With the imprisonment of Bernie Madoff and the recovery of the stock markets it seems like that the public eye on Madoffs Ponzi scheme is going down as well. Nevertheless, for (hopefully) a long time his name will stand for a so far unprecedented fraud and therefore investors should take their lessons and understand what really happened.

For those who are interested to dig deeper I recommend the reading of the “Madoff Chronicles”, a series of rather long features (you better print them) on his rise and fall, published in Vanity Fair. It is well researched and offers profound insights on his “system” and family-business, the role of funds and banks feeding him with billions and the greed and naivety of investors. Since the articles are not written for the “Economist” they include a fair share of amusing side notes, making it fun to read (at least as long as you have not been a client).

If you like these articles you might be interested as well to learn more on the role of the biggest feeder fund in the Madoff fraud, the Fairfield Greenwich Group, which alone “entrusted” USD 7 billion of its clients money to Madoff. Finally, if you are sick of Madoff and the Upper East Side Crowd and need some sunshine check “Pirate of the Caribbean”. A feature of Allen Stanford, who managed to rise from a Texan gym owner to running the second biggest Ponzi-scheme ever. During his “big times” it looks like he certainly had a lot more fun than Madoff. Now it seems their “luck” has changed, since Stanford awaits his trial sharing his cell with ten inmates and heated by the strong Texan summer sun.

It is December 4, 2007. The Sub Prime Crisis had already caused USD 60 billion in losses to financial institutions. All the highly paid analysts consult  their year-end-crystal balls. And here comes the forecast of stock pundit Abby Joseph Cohen of Goldman Sachs. Have fun…

“Abby Joseph Cohen, the Goldman Sachs Group Inc. strategist whose call for a year-end rally in U.S. stocks hasn’t come true, predicted the Standard & Poor’s 500 Index will rise 14 percent by the end of next year. [2008]

“Cohen, 55, says the S&P 500 will climb to a record 1,675, extending the longest stretch of annual gains since the 1980s. She joins strategists at Citigroup Inc., Bear Stearns Cos. and Strategas Research Partners LLC in forecasting the benchmark will at least reach that level in 2008.

” ‘U.S. stocks will offer moderate gains and will dramatically outperform bonds over a 12-month horizon,’ New York-based Cohen wrote in a report today. ‘Recession will likely be avoided, due to strength in exports and capital spending by corporations and governments, and thanks to a vigilant and flexible Federal Reserve.’

Cohen was finally fired as “chief forecaster” in March 2008. On August 6th, 2009 Abby Joseph Cohen declared, “the new bull market has begun”.

Check out this tragic pre-crash-video-ad of Kaupthing bank and you will see the root cause of the financial crisis:

“We thought we can double in size. And we did, every year for eight. We thought we can increase our balance sheet. And we did by 500% in just three years…”

Watching this in 2009 is just so incomprehensible. How could the egos of some bankers become so big? How could they be so self-assured about the massive risks they were taking? How could they proudly point out “achievements” like growing their balance sheet by 500%? I guess, it is just the eternal cycle of boom and bust, of mania and crash that leads sensible people to produce such advertising.

Thanks to Ultimi Barbarorum for the tipp.

The Swiss government made an annualized profit of about 30% on its emergency investment to stabilize the UBS. The total amount is approximately Swiss Francs 1.2 bn. That’s what I call a cool investment. The government has taken advantage of the swift restructuring of the UBS and of its global business model which is believed to make a succesful return.

Yet, I am wondering whether the UK, US, German and other governments will also pocket such a handy profit on the billions they have pumped into ailing financial institutions? I doubt it because, as opposed to the pragmatic Swiss government, most other governments have supported a great many institutions which are a lot less healthy than the UBS and also unwilling to change their outdated structures and business strategies. Many of these state-run zombie financial institutions still have bad management, unclear business models and a less than certain future. One particularly good example are the German Landesbanken. Those banks have a de facto government guarantee for their capital. Yet, what have they done with all that cheap money? Yes, you guessed right - a great many bad investments. Now you would expect that these banks are restructured, sold, merged - whatever is necessary to make them profitable. But the politicians keep them alive because they need them to finance all their election pork and petty projects. No way the tax payer will ever see its money coming back…

Read our comment on the disclosure of  details of the UBS settlement here.

For Pessimists: Royal Bank of Scotland’s super-bear Bob Janjuah predicts new stock market lows in the coming fall. I am just wondering why these bankers with the cristal balls still have to work for a salary in a bank instead of making tons of money on their own predictions?

For Optimists: The Economist analyzes the astonishing rebound of the Asian economies and what it means for the developed countries.

For Realists: The Atlantic has a long piece on Warren Buffett and value investing: “What would Warren do?” Great introduction and outlook to the stock market for longterm investors.

While doing research for our upcoming report on the quality of websites of private banks I came across some rather surprising special private banking offers.  I am not talking about dedicated departments for assisting clients in buying art of spending money on philanthropy. These are pretty much a “must have” for all the big players, hoping to give their private banking cash-machines an aritistry and “non-profit” touch.

But how I learned it can be much more specific: I found professional teams solely for advise on products such as diamonds, coins or aircrafts and groups that cater exclusively to the hot shots in sports and entertainment (hopefully not involved in the frequent bankruptcies of celebrities). Of course special situations in life are addressed with special programs such as the management of wealth (or whatever is left of it) after a divorce (judging by the picture I wonder why not more people get divorced) as well as tailored offers for domestic partners and native americans.

Not belonging to any of these target groups I probably never find out if I could find there some of the tailored, not “one size fits all” services I always dreamt of.

Today the Liechtenstein government announced that it has agreed with the UK government on a new tax treaty. Part of this new treaty is the rule that Liechtenstein banks will have to check on any UK-clients whether their assets have been declared to the UK tax authority. Clients with undeclared assets will not been accepted as clients or, if they are clients already, will be forced to close down their accounts in Liechtenstein.

UK clients with undeclared assets in Liechtenstein will have the opportunity to disclose their assets to the UK tax authority and receive a somewhat lenient treatment. Disclosure has to be made up to 10 years back. The tax rate will be at a maximum of 40% and the penalty at 10% of the payable taxes. These rules will apply in a limited period between 2010 and 2015.

These new regulations are only a small step away from an automatic exchange of client information between governments. In fact, this means that any Liechtenstein wealth manager is now an unpaid helper of the UK tax authority. UK citizens lose their financial privacy completely. This confirms strongly our view that the end of offshore banking is near. Liechtenstein, and Switzerland as well, will face dramatic changes in their respective banking industries. Many Swiss and Liechtenstein banks believe that they can differentiate themselves for many other reasons besides the banking secret. We doubt this (if you don’t count the extraordinary high fees as a differentiator). It is a matter of survival for the Swiss and Liechtenstein banking industry to radically re-think their strategies and re-invent their business model. If they have not done this yet it will be too late soon.

A great reality-check on stock-picking and short-term trading as means for making money and managing wealth:

(…) In a stock investment competition held by a corean online stock market information provider Paxnet, a five-year-old parrot from Papua New Guinea beat most of the participating stock investors. The female parrot, named Ddalgi, or strawberry, competed with 10 stock investors who have invested in stocks for 7.5 years on average. The human investors could pick any stocks they wanted, but the parrot picked from among only the top 15 stocks in terms of market cap of both the main bourse and the junior stock market, Kosdaq. Every Thursday, Ddalgi picked from the 30 balls bearing the names of the 30 companies to replace part of the stocks in her portfolio.

The feathered investor recorded a 14.5 percent investment return as of Monday, while the 10 human investors averaged a 0.6 percent loss. Only two investors outperformed the parrot, with seven investors in minus territory. One of them, with 19 years of experience, recorded a 23.5 percent loss. While the avian investor has bought shares only seven times, most of the human investors have made over 160 transactions so far. One has traded shares over 1,200 times during the five-week period. (…).

“On top of making short-term transactions, the investors usually bet on small- and medium-sized shares that fluctuate hugely,” said Chung, General manager of Paxnet. He added that many of the investors were shocked to perform worse than the parrot. “They know in theory that one should make long-term investments and choose blue chips. But few people do that in reality.”

There have been a number of similar competitions between stock investors and animals, including a chimpanzee. The animal investors were designed to make long-term investment in blue chips, as in the case of the Ddalgi. “The animals won in most of the cases. It seems to prove the efficient market hypothesis, which says it is hard for investors to beat the market.”

It is probably fair to assume, that on top of her stunning performance the Parrot will neither charge fees nor take any kickbacks.

You better have not followed this rule in 2009: Since the beginning of May the DJ Eurostoxx50 has gained more than 400 points and the DowJones more than 1000 points.

However, stock traders like to point out that there are many other rules, some of them very complex who supposedly have proven themselves. Well… I am not sure. There is an interesting piece in the Wall Street Journal on trading rules and data mining. Here is the short summary: math and stats wizards are analyzing millions of data points to detect patterns in the behavior of the stock market. Based on these historic patterns they create predictions for the future behavior of the market, so called trading rules. Unfortunately, in most cases these predictions don’t work very well. Actually, over the long term, almost none of them hold true.

There is one great example in the WSJ article: The annual butter production in Bangladesh explains 75% of the behavior of the S&P 500 index, a US stock market index. When you add US cheese production and the number of sheep in the US and Bangladesh as variables, you can explain the ups and downs of S&P500 with 99% accuracy. Isn’t that great? But better don’t bet on it for the future…

This blog has always recommended a long-term outlook, fundamental analysis and, for the most part, relatively simple index investments to grow your wealth. If your wealth adviser has other ideas - why don’t you confront him with this negative evidence on the success of most trading strategies?