The Mike Gasior Blog

And I’m actually IN London and will be in the studio with my friends on “The N@ked Ckub” on 104.4 FM, Resonance FM from 9:00 t0 10:00 p.m. London time on Monday, June 25th.

(4:00 to 5:00 p.m. New York time)

And if you aren’t in London you can listen in live from all corners of the world via the Internet live via their radio station at this link:

www.resonancefm.com

I’ve been in Europe on the trail of uncovering an amazing fraud involving “covered bonds”, which may in truth may be covered by very little indeed.  I will share more info with you when it’s okay to do so.  All I can say right now is that this news might actually move Greece and Spain off the front pages here in Europe.  The research I’m in the middle of has been startling and I believe the markets will be shocked.

So stay tuned!!

See you on the radio.

Since we now know it’s going to be the Patriots and Giants in a rematch of the amazing 2007 Super Bowl it reminded me of something I oddly didn’t know until last year. And once I’d heard this “tidbit” it made me unusually aware of something that has gone on for years but I’d never paid any attention to. It’s starting already this morning when I heard two separate radio commercials, which makes me want to share it with you.

First was an ad from a big, northeastern electronics chain luring you in to pick up a new, big-screen television for “the big game”.

Second was one for a supermarket, encouraging you to stop in to pick up goodies for “the big game”.

While it makes extremely obvious sense, I’d never really considered that the term “Super Bowl” is very fairly valuable term in commercial terms. But last year I read an article the detailed how aggressive and diligent the NFL is in protecting that exact phrase. Were a supermarket or electronics store advertise their big “Super Bowl Sale” they can be pretty guaranteed to find an NFL lawyer at their doorstep the next morning. And they’d likely be carrying court ordered cease and desist paperwork. I actually have read descriptions of NFL legal actions against people who infringe referenced as being “SWAT team like”.

Don’t try using “Super Sunday” either. The NFL has that one trademarked AND copyrighted too.

So be prepared to be inundated with advertising for “the big game” for the next two weeks. And for one more final tidbit for you today….the NFL actually pursued getting “The Big Game” copyrighted and trademarked back in 2007 but failed.

I don’t watch much football but I never miss “the big game” and I think this year’s match-up should be very interesting plus Madonna at halftime. I just have to remember to pull out my old 27″ tube TV. As a business owner and writer, I have a deep understanding of the intricate nature of copyright law and I am aware of this section of Federal law:

US Code Title 17, Chapter 1, Section 110 “Limitations on exclusive rights: exemption of certain performances and displays,”

TV broadcasts and movie showings can only be displayed so long as “no such audiovisual device has a diagonal screen size greater than 55 inches, and any audio portion of the performance or display is communicated by means of a total of not more than 6 loudspeakers.”

I kid you not. Look it up.

Over the past year I’ve been spending an increasing amount of time during most interviews speaking to the growing crisis in Europe and my outlook on the Euro as a currency. I always thought the concept of these various countries with their vastly different economies, work ethics and cultures was going to be a fascinating experiment that I would enjoy watching play out. Frankly, it is still amazes that any monetary union could have ever occurred that included both France AND Germany.

I’m not sure of the first time I predicted on a radio program or in a print interview that I was certain that the European Monetary Union would not survive, but I’d estimate it was likely two years ago. Like many of the predictions or opinions that I put forward, it likely sounded foolish for me to say. When the Greece crisis began to unfold it suddenly sounded less and less foolish and I would then be asked to expand on “how” I thought the union might break. My answer was that I wasn’t sure who would be the first one out, but it was likely either Greece (who might be unwilling to put up with other countries telling them what to do) or Germany (who might be unwilling to pay for the bad management of countries in southern Europe).

What investors (lenders) around the world will need to decide at an accelerating pace which countries are most likely to pay them back and lately some of the best managed countries are the emerging economies. Unless you’re a person who follows the financial markets closely it’s easy to lose the forest for the trees with the barrage of news about events taking place in the U.S. and Europe, much less the rest of the world. So as I’m fond of doing, let me summarize the past six months with some quick facts in easily digestible bites:

–The United States lost its AAA with S&P last August

–France and Austria lost their AAA ratings this week as S&P cut their ratings one notch to AA+.

–S&P reduced the ratings for Italy, Spain, Portugal and Cyprus by two notches.

–S&P reduced the ratings Malta, Slovakia and Slovenia by one notch.

–S&P downgraded the European bailout fund (the EFSF) by one notch to AA+.

I can hear plenty of you thinking the same thing; “So what Mike?”. Here is the kind of takeaways that the economist in me finds fascinating and illustrates the decline of the established countries and the ascent of the emerging economies:

–During the past 10 years, Russia’s rating is up three notches and Italy is down five.

–Greece is now CC rated. Two ratings away from D for default.

–Portugal and Turkey both have a BB rating now. Surprisingly bad for Portugal. Surprisingly good for Turkey.

–The only major emerging economy in Europe, the Middle East and Africa to see its rating fall over the past decade was Hungary.

I was impressed that S&P ignored all the rhetoric and campaigning by countries and simply looked at the numbers to make their decision to downgrade the U.S., nine European countries and the European bailout fund. The numbers looked bad and are getting worse so they pulled the trigger.

Investors didn’t immediately go running for the doors when the U.S. downgrade took place, but eventually investors (lenders) are going to have to take a hard look at the numbers also as well as the political climate in those countries also. There was a day when political instability applied to smaller, emerging economies, but the only honest explanation for the huge debts and deficits in most of Europe and the U.S. was a lack of leadership.

I don’t know whether these investors would admit it publicly or to themselves, but they are making a spectacular gamble by lending money to many of these countries. They might still study economic data or guidance, but as they focus on in-built problems ignored for years they know they are essentially making bets on political decisions that have yet been undertaken and, in the worst case, may be unachievable.

As entertaining as it has been for me to watch the rise, and now I believe fall, of the Euro, it will also be interesting to have watched the rise of the West in my lifetime and now perhaps our decline. For our children and grandchildren I hope our leaders change the trajectory soon but I’m not very optimistic. I’m curious to hear if you are.

If you might happen to be in the Boston area next Thursday, November 4th, I will be the keynote speaker at the Global Securities Lending Summit at the Ritz Carlton. My speech will be at 4:30 and they have provided me a link that will allow anyone who wants to attend to acquire a ticket for free. I plan to discuss the people and events that helped get us into this current crisis and what the future looks like from here. Just visit this link for all the information to register:

http://gsl.tv/gsl-boston-securities-lending-summit-2010

I hope all has been well with you and I hope to see you soon.

My November newsletter will be sent out shortly.

I’m kidding of course, but it has been a pretty interesting month and a half I will admit.

Thank you to everyone who wrote out of concern, thinking that some angry insurance executives might have had me “clipped”, but I’ve just been busy.  I’m actually still pretty busy but thought I’d pop my head back above ground and see what is going on out there in the world.

First things first, I am already working on a newsletter and with some luck it will be sent out at the beginning of next week.

With regard to the story on insurance accounting scandal, my work was pretty much completed for the company I focused on as of March 27th and I’ve been in continuous contact with the fantastic reporter who is covering it.  It’s obviously a complex story, as most accounting related stories are, and I feel fortunate to have connected with an extremely bright guy how loves the nuts and bolts and details that make up a story like this.  I’m confident he is going to do a great job and it will be nice (for a change) for one of these scandals to be revealed by the media, rather than covered by them after the fact.

So I have been (and will continue to) maintain quiet and let the actual media cover the story and I understand them wanting to make certain of all the facts before going public with a multibillion dollar scandal.  So in the meantime I did some of my own investigating and took a close look at 91 other insurance companies as well as assorted other financial institutions.  It is quite amazing how easy it is for me to spot what strike me as grevious errors and worse in the reporting of so many companies.  Billions dollar issues are a dime a dozen and the fact that auditors, executives, rating agencies and regulators don’t even seem to notice the difference is simply astounding to me .  I also think that a large part of the reason that we’re in the economic ditch we find ourselves is exactly BECAUSE no one really understands what in the hell is going on.  Truthfully, it is really my opinion that the executives and directors of these companies aren’t blatantly trying commit fraud (or at least most of them), but that they take a leap of faith and put their signatures on the financials of their company and hope they truly are accurate.  It is also my opinion that most of them, including the CFO’s, don’t have a clue about most of what’s contained in their statements and therein lies the danger for themselves and for the economy.  “They don’t know what they don’t know”.

I’ll certainly write more and tell you the story when I feel the time is appropriate.

But much has gone on in the world since I last wrote a post here including the excitement this weekend in Times Square.  It was lovely to find out is was a guy from Connecticut too.  What is always fun about any story like this is when the media start poking around with neighbors to see if anyone could have seen this coming.  Here’s my favorite information from a story I read this morning:

Shahzad’s behavior sometimes seemed odd to his neighbors, and he surprised a real estate broker he hardly knew with his outspokenness about President George W. Bush and the Iraq war.

“He mentioned that he didn’t like Bush policies in Iraq,” said Igor Djuric, who represented Shahzad in 2004 when he was buying a home.

Djuric said he couldn’t remember the exact words Shahzad used about Bush but “something to the effect of he doesn’t know what he’s doing and it’s the wrong thing that he’s doing.”

“I don’t know if he mentioned 9/11,” Djuric said, “but something like that, Iraq has nothing to do with anything.”

Didn’t like Bushes policies in Iraq?  Bush doesn’t know what he’s doing?  Iraq had nothing to do with 9/11?

Well I suppose we’d better immediately arrest John Kerry, Barrack Obama and about 150 million Americans if these sorts of feelings are the sign of probable terrorist activity.  Good grief is all I can say.  If this is the best the media can offer us on what was going on in this moron’s head I think I’d rather know nothing at all.  And if you think my moron comment relates to his luckily poor bomb building skills, you’d be wrong.  Now understand that I’m not a professional terrorist or anything, but if I had just parked an SUV that was traceable to me parked in the middle of Times Square filled with any sort of explosives, I might have waved down a taxi moments after locking the Pathfinder’s doors and headed straight to JFK for my flight to Dubai.  I don’t think I would have waited until days later when the evening news was reporting that the FBI and CIA were looking for a naturalized Pakistani male as a suspect.

So watch for a newsletter next week and for me to become more active in here again.  I also have some great sessions coming up in New York this month.  You can check them out at the below links:

Mortgage & Asset Backed Securities
–May 17 & 18, 2010
http://www.afs-seminars.com/mortgage.html

Securities Operations, Processing & Accounting
–May 24 & 25, 2010
http://www.afs-seminars.com/securities-operations.html

Fixed Income Calculations & Principles
–May 26 & 27, 2010
http://www.afs-seminars.com/fixed-income.html

You can also view all my 2010 sessions at the following link:

http://www.afs-seminars.com/schedule.html

I will openly admit, that while I am fascinated by economic data and information of all sorts, I haven’t honestly been following the trajectory of the residential real estate market.  There have been times when certain factoids have caught my fancy and I’ve mentioned them here or in my newsletter or even Twitter usually in relation to a larger commentary on the direction of the economy.

Probably, like most anyone who reads this blog and has at least some passing interest in financial topics, we all know the states hit hardest by the real estate decline and suffering the highest rate of foreclosures:

• California
• Nevada
• Florida
• Michigan

Of course, everyone knows that there is at least some degree of “crisis” in every state and I’d read minor headlines here in Connecticut about an increasing rate of defaults and foreclosures, but the numbers were still below the national averages so I sort of subconsciously didn’t pay much attention.  After all, I’m one of those people who loves picking up those free real estate magazines whenever I’m in the convenience store and thumbs through them in a voyeuristicly nosey sort of way and it never seemed to me that prices here in New England had declined much at all.  So I suppose I concluded that yeah…the market was slow here, but not really any sort of “crisis”.

Well I did my usual Sunday routine of going through the papers and watching the political shows on television.  My local paper here in Connecticut is the Hartford Courant (and the oldest, continuously published newspaper in the country by the way) and having the “weekend plan” means I have to get the Friday and Saturday papers in order to get the Sunday one.  I basically don’t read anything but the Sunday one, but the Friday edition always has a section called “Courant Real Estate”, which beside have a bunch of advertising, also lists all the real estate transactions from a variety of towns that make up the central part of the state.  Perhaps representative of 25% of Connecticut. 

I always peruse these transactions out of pure nosiness again, especially focusing on the towns that immediately surround me to see if there are any properties I recognized, and I have noticed more and more listed that have a sale price of $0.  These are transactions that aren’t sales but are instances where the homeowner has lost title to their house back to the bank and it struck me that there seemed to be an awful lot of them.  So for the hell of it, I grab a highlighter and pen and started to mark up the pages.

In total there were 222 real estate transactions the previous week in this limited number of Connecticut towns and after counting there were 65 of them that were bank repossessions.  Just about 30% of all real estate that changed hands here in one of the more affluent parts of the country were people losing their homes back to the bank.

And I’m the economist and am totally aware that this was just one week in a small part of a small state and is purely anecdotal.  But still.  That’s an awful lot, or at least it seems like a lot to me.

In one of the towns, Bristol, Connecticut, they had 15 total transactions and 10 of them were for $0.  Hartford had 19 transactions and 10 were for $0.

I’m not making any point here, but as suggested in the title of this post, just sharing an interesting observation with you.  But these anecdotes just keep adding up in my head.  The observation that no fast food restaurant or store I go into has anywhere near enough registers open.  Or when I wander the large aisles in Walmart they are no longer filled with pallets and pallets of inventory but are eerily empty and able to have a tractor trailer driven down them.  So while everyone seems to be in agreement that the recession is over and the recovery has begun, it is certainly difficult to observe that anywhere out on Main Street.

I am once more going to be a guest on The Naked Short Club radio program in London today, which will air today at 4:00 p.m. New York time.  The line-up of people who are on the show today always result in spirited debate regarding the economy, markets and just about anything else.  You can listen via the Internet at this link:

www.resonancefm.com

On a much lighter note, I finished my maple syrup production yesterday and had a very nice crop of Mike Gasior Grade “A” Organic Medium Amber this year.  The wildly swinging temperatures made for unpredictable sap flows from my trees, but I managed to collect about 60 gallons, resulting in almost a gallon and a half of final product.  Next year I’ve decided to more than double the number of trees I tap to try and increase my production so I might be willing to actually give some of the precious liquid to a few friends and relatives.

Tomorrow I plan a post here to the blog outlining my concerns about China suddenly turning into the “next big thing” except this time in a bad economic way.  I know I’ve written of my concerns about China previously, but a sudden, rapid downturn in their situation will be very hard for the rest of the world to cope with in this delicate climate we all find ourselves in right now.

I’m hoping most people have much more concerning issues to worry about than decisions made by the bankruptcy judge who has been charged with liquidating Bernie Madoff’s assets to his investors. I, however, had a meeting in Manhattan yesterday and the train ride into and out of Grand Central Station gave me the luxury of time to actually read five different newspapers.  Some stories were simply junk food for the mind, like Catherine Zeta Jones’ very lovely all leather outfit and the troubles being suffered by New York Governor David Patterson.

But then I saw a story relating to a decision made relative to the Madoff case, which the article described as “controversial” and is “likely to be appealed”.

Now I’m no lawyer, although running my own business for over twenty years and reaching the age I have leads one to have had some experiences with the courts.  And as much as I might have disliked some of the decisions in cases I’ve been personally involved in, usually I could at least understand the logic used by the courts in making the their rulings.  With regard to this Madoff decision, I literally couldn’t find ANY reason whatsoever for there to be controversy; and I cannot imagine what grounds there will be for the decision to be overturned on appeal.

Here is the basic premise to the ruling a couple of days ago.

You and I were both investors in the Madoff fund and we both put in $1 million exactly 10 years ago.  Over the years Madoff lied to us and told us our original investments had grown to be worth $4 million, which certainly seemed wonderful to us both, but of course turned out to be total fiction at the end.  The difference here is that over the past few years you took several withdrawals from the fund, which just so happen to total $1 million, or your original investment.  The fictional statements you receive from Madoff, however, still show you having $3 million more left invested.  Since I didn’t make any withdrawals, my balance is at $4 million.

At the end of the game here, it became clear that Madoff didn’t have the $65 billion he’d been telling his investors was in the fund, and there was actually not even enough to give back people’s original investments.

What the recent ruling basically says is that your CLAIM as an investor on whatever amount of monies that are actually left is whatever you originally invested MINUS whatever you’d withdrawn.  So in your case, you would have no claim whatsoever on remaining assets since you’d taken out your entire original investment.  The ruling simply states that the phony $3 million in profits doesn’t count toward how the remaining assets get divided.  Otherwise, you’d be able to make a claim for 75% of whatever I was trying to recover though you’d taken out ALL of your original investment and I’d gotten jack.  Common sense (to me at least) would say that would be ridiculously unfair, and in this case, the bankruptcy judge agreed.

So how in the world is this controversial and appeal-able?  All I can hope is that an appeal would go nowhere and that justice will actually be served, although we all know that there WILL likely be an appeal that goes nowhere and that only the lawyers will be served with fabulous fees.

What I’m curious to know is that since we both put in $1 million, what if there is only 50 cents on the dollar in assets remaining now for distribution?  That would mean I’m only going to get $500K of my money back and YOU got your entire amount and are oddly ticked off.  Further common sense to me would dictate that the court should rule that you have to produce $500K of the money you withdrew to compensate me for this unfairness.  Now there’s an appeal I could live with.

It is 7:30 p.m. on Thursday, February 25th as I write this.  And here is the headline I just saw break out of Japan (where it is already tomorrow morning):

Feb. 26 (Bloomberg) — Japan’s consumer prices fell for a 12th month in January, putting renewed pressure on policy makers to eradicate deflation that hampers the recovery.

I took plenty of grief over my newsletter last month, which was glowingly titled “The Doomsday Scenario”, but I would hope that MANY of you would vouch for the fact that I have been making allusions for YEARS that we are hurtling down the exact same road Japan has been traveling for 20 years already.

I’ll give you a Cliff Notes version of things that should strike you as familiar:

–Stock market bubble bursts

–Real estate bubble bursts next

–Consumers go into a spending funk as their jobs and financial futures suddenly become worrisome

–In an effort to stimulate the economy and help troubled banks, the central bank drops their lending rate to 0% and prints tremendous amounts of currency to hopefully spark some inflation

–When the consumers do not respond, the government begins issuing massive amounts of debt to finance public works/stimulus projects

–Ultimately the government has issued so much debt that the total amount is larger than the country’s GDP.  Rating agencies rate the country’s sovereign debt as “junk”

–The lending rate from the central bank stays at effectively 0% for a decade yet there is rampant deflation and a landscape filled with zombie banks

Lots of you will think I’m painting a futuristic picture of America’s trajectory, yet all I’ve done is tell Japan’s history from 1990 until an hour ago.  So if a lot of the bullet items seem familiar, there’s a damn good reason why.  And I can promise you one thing that Ben Bernanke, Alan Greenspan, Paul Volker, Tim Geithner, Larry Summers and I might actually agree on:

Deflation = Death Spiral

So I can most certainly promise you that I’m not wishing for a deflationary cycle in this country at all.  I’m simply dreading one.  And when all the talking head stooges on television are agreeing that the only possible future for our economy is an inflationary one, you can almost be completely assured that they are wrong.

And my work on insurance company annual statements is going well enough that a global media outlet wants to work with me to actually break the story.  The dollar amounts involved might even merit using the word “Scandal”.

I have to admit that I’m smugly pleased at what I think is a clever title for this post.  The subject matter is somewhat arcane and did a decent job hinting toward what’s to come.  First let me say that I am hard at work writing my February newsletter and I expect it to be sent out to subscribers on Monday.  It was that writing, which took me into this diversion.

To set up the situation here, I was commissioned for a consulting project with a large insurance company last year (I’ve done many such engagements over the years) and part of my work was a review of the financials of many of their direct competitors.  While it is not something I feel particular pride about, it is true that I am among the world’s leading authorities on what an insurance company’s statutory (what they file with insurance regulators) and GAAP (what they report to everyone else) financial statements are supposed to look like.  Many of you who read my blog and newsletter know too well that as an insurance company, one of the most horrifying things you can do if you’re an insurance company is hand me your annual statement along with a red pen, highlighter and Post-It Notes.  Because it is likely that I will be handing back your worst nightmare come true with regard to the errors (and worse) I have found.  I’m not sure where I became “Rain Man” for this kind of thing, but it’s a peculiar skill set that has helped many of my consulting clients avoid intense scrutiny and trouble from regulators, auditors or investors.

In my somewhat cursory review of my client’s competitor statements I was very surprised at the sheer volume of errors, misrepresentations, miscategorizations and a general aggressiveness in more of these annual reports than I would have ever expected.  Mind you, I was not AT ALL looking through these financials in any effort to “grade” them but I found it very striking nonetheless.  Here is where the story becomes interesting….

A couple of the companies where I found fairly substantial problems were “friends” of mine (I have a very mafia-like definition of the term “friend”, meaning that if you’ve paid me enough money over the years I don’t abandon you when you need my help) so I reached out to some senior people at these organizations.  I wanted to give them a little bit of a heads up prior to their 2010 statements reaching the point of critical mass where changes cannot be made in any practical way were I to find anything “material”.  Admittedly, I wasn’t going to do a thorough, line-by-line type of review just for the fun of it, so I suppose I was indeed angling for them to hire me to help them fix these problems.  Much to my surprise I was largely ignored and not one of these “friends” even inquired deeply enough to make me think they were concerned in even a minor way.

Thinking that I still might be on to something with my discoveries I dropped personal letters (not emails…letters) to the CFO’s of my non-friend companies to make them aware of who I am and of the issues I’d discovered in their financials.  Once more I was met with silence.

Over the years I have made many, many, assertions, accusations and worse about mispricings, misrepresentations, misstatements, and borderline illegal activities within the financial markets and among large institutional investors.  Never have I actually called a specific institution in on the carpet for a public disemboweling, but that all changes right after March 15th.

The large investment and commercial banks are fortunate thanks to the fact that they are not required to report ALL their investments in a public format, where they list each and every position they hold along with the price paid, current market value and ratings.  Insurance companies are not so lucky.  On March 15th of every year they are required to file a statutory annual statement with the insurance commissioner of every state in which they conduct business as well as the NAIC (the National Association of Insurance Commissioners).  Within this statement is a listing for every single investment they hold: real estate, mortgage, limited partnership, bond, mortgage or asset backed security, stock, short term and derivative.  They must also calculate their Risk Based Capital position, which gives regulators a sense for how risky of an enterprise each company is based on their product line and investment portfolio.  On top of that, life insurance companies are also required to set aside reserves to protect policy holders from the company making poor investment decisions.  These are publicly available documents and in the near future I will be walking you through the pages of some of them to show some of the most egregious behaviors I have found.  I will be making you aware of the senior management people whose signatures endorsed the statements in the front of the book along with any auditors, rating agencies or others I feel should have identified the errors prior to filing the statements with government agencies.  I may also move on to pension funds.

So that’s my fair warning.

I really don’t intend this to be mean spirited, but if you’re a U.S. insurance company and have taken an aggressive approach in how you report your investment holdings in an effort to mislead people and put the economy at peril, you can expect to have your financials dissected in an extremely public way.  I’m also currently discussing sharing ALL my detailed work with two internationally respected media outlets that have expressed an interest in covering this story.

I’m going to start with a very large life insurance company, but plan to identify companies of all business lines and sizes so no one feels left out.