To cool the economy four years ago, the government closed private Tieben Steel and detained its founder. Times have changed.
Gong Jing and Wang Heyan, Caijing 6 February 2009
January 10 was a celebration day in Changzhou, not only because Premier Wen Jiabao paid a special visit, but also because his official stop in the winter chill may have signalled a long-sought end to a sad drama over a shuttered steel mill.
Business and economic development leaders in this city in southeastern Jiangsu Province were especially hopeful that the premier’s visit was a vindication of sorts, four years after a central government crackdown led to the detention of top executives at now-defunct Tieben Steel.
And on a broader scale, the Changzhou stop for photos and handshakes underscored the central government’s eagerness to support the private sector amid the current economic downturn.
The State Council – China’s cabinet – had expressly ordered Tieben’s shutdown in April 2004 as part of a massive, nationwide campaign to rein in what was then an overheated economy. One of the government’s slowdown measures called for halting certain, rapidly expanding private companies blamed for overzealous development.
In the process, Tieben founder Dai Guofang was detained by authorities, falling overnight from his proud position as a successful entrepreneur in Changzhou.
At that time, Premier Wen personally brought the Tieben case before the State Council and ordered local governments to punish anyone responsible for what was considered the company’s problematic expansion. In April 2004, the council halted the project and officials from nine ministries launched a probe.
A task force assigned to investigate Tieben soon determined that Dai and other executives, in their push for progress, had violated several rules, including those governing land-use rights and financing. Dai was taken into custody, and several local officials were sacked. Two years later, Dai was accused of tax fraud at a four-day trial.
But a verdict in the Dai trial has yet to be announced. And last October, after nearly four years of detention, Dai was quietly released on bail. He’s now under house arrest.
Dai and his company apparently were in the wrong place at the wrong time. But times have changed.
In the four years since Tieben’s shutdown, the economy has switched direction. No longer overheating, the economy now faces a rapid slowdown, prompting the central government to loosen what had been tight, macroeconomic controls. Ultimately, business in Changzhou may benefit.
Dai’s Cloudy Future
Dai’s lawyers had fought for bail ever since the detention began, and his surprise release – under police escort -- was considered a victory that preceded the premier’s visit by three months.
Dai’s low profile since his release is being enforced by local police. They closely watch his three-story house and reject all interview requests. Dai cannot leave his home nor welcome a visitor without a local court’s approval.
During a recent trip to Changzhou by a Caijing reporter, Dai’s mobile phone was switched off and his family members were warned not to speak with the press.
A source close to Dai said he’s determined to fully cooperate with the government and hopes to put the case behind him as soon as possible. Dai is optimistic and, if he’s freed, wants to open another steel mill, the source said.
The source also said Dai’s case has had a serious impact on his family, especially his three children. His teen-aged son, for example, dropped out of a junior high school and now spends all his time at home.
Under Chinese law, Dai’s bail period can last as long as a year. Afterward, he must be returned to custody or prosecutors must withdraw their complaint.
Tieben Crackdown
The entire steel industry including Tieben was targeted by the government in 2004 for driving the economy toward overheating. Between 2002 and ‘03, steel industry fixed asset investment rose 96 percent. It then jumped 107 percent in the first quarter 2004. Small and mid-sized steel mills were popping up across China.
But regulators considered many of the smaller mills, including Tieben, superfluous. Tieben was built with tens of billions of yuan on 1,196 acres of former farmland. Its production plan called for an annual output of 8 million tons of steel.
The government’s sudden, tough crackdown on the Changzhou business had a chilling effect on private enterprises across China. Entrepreneurs got the message, and the economy started slowing down.
The official Xinhua news agency published a long list of Tieben wrongdoings released by government investigators. But many were actually problems tied to local government officials who had gone around central government land and lending rules – thereby benefiting the steel mill -- by subdividing land and issuing project loans based on small, individual plots.
Tieben and Dai were tied to two major allegations cited by Xinhua: cooking the books to obtain bank loans, and tax fraud.
Dai’s court case led to a complicated and opaque trial that opened in March 2006. By then, prosecutors had reduced the charges to forging receipts to evade taxes, punishable by up to 10 years in jail.
One local official close to the case told Caijing that the investigation was thorough and extensive, but that neither Dai nor Tieben were ever accused of bribery. Moreover, the official said, the land and lending rule violations were mainly blamed on the local government.
Such a dilemma is common among entrepreneurs facing what are considered “mismatched” crimes and convictions in China. These entrepreneurs are brought down on charges unrelated to the crimes for which they were convicted.
Defense lawyers think even the tax fraud allegations against Dai can’t stand up to close examination, since receipts used as evidence were actually forged by one of Tieben’s upstream suppliers.
New Environment
Since Tieben’s closure, China’s steel industry – especially state-owned mills – have roared forward. Production capacity rose to nearly 500 million tons in 2008 -- almost double the 2004 level.
Some private steel mills that weathered the 2004 storm have reaped windfalls. These included the companies Shagang and Jianlong, each of which posted substantial increases in revenues and profits in recent years.
But since June, in line with the global economic slowdown, steel production has cooled. Product prices fell by half over the next eight months, and the projected demand of 200 million tons in 2009 falls far short of the industry’s 500 million ton capacity.
Unlike 2004, when the central government picked fights with local governments and private enterprises, Beijing decision-makers are now looking to build partnerships with these groups. They are seeking teamwork to shore up the economy.
In Guangdong Province, for example, the provincial judiciary has relaxed law enforcement standards, declaring that entrepreneurs accused of minor economic crimes should be shown leniency.
It may be too late for Dai and the Tieben mill, where six giant furnaces are now rusting near the banks of the Yangtze River. But the rest of Changzhou – and private business in general -- is looking hopefully toward the future of entrepreneurship.
Insight Down South By SEAH CHIANG NEE February 7, 2009
The need to dip into foreign reserves for part of a S$20.4bil (RM49.1bil) stimulus package raises questions on the government’s global investment policy.
AS RECESSION deepens and foreign investment values tumble, the government is facing rising public pressure for information on just how badly the national reserves are faring.
Singaporeans are becoming more anxious about not knowing how much their collective savings have been lost – or tied up – in troubled investments as a result of the global market collapse.
The amount of losses has not been disclosed, except in the most general way, but market analysts believe that they are in the region of many tens of billions of dollars.
The people’s unease, which has been building up for a year, took a recent turn for the worse when the government dipped into the reserves for part of a S$20.4bil (RM49.1bil) stimulus package.
It is the first time in history that Singapore has done so, drawing out S$4.9bil (RM11.8bil), a drop in the ocean compared with total reserves believed to be more than US$200bil (RM725bil).
This was followed by a Bloomberg interview in which Singapore’s Finance Minister revealed that US$24bil (RM87bil) was invested in three of the West’s worst hit banks in the past 14 months.
The banks were UBS AG (Switzerland’s largest) and America’s Citigroup and Merrill Lynch, which was subsequently taken over by Bank of America.
Decimated, their values are still falling. Other invested equities have fallen sharply, too.
“We haven’t seen the worst yet,” warned minister Tharman Shanmugaratnam, indicating more trouble ahead for Singapore’s bank investments.
At a time when recession-hit Singaporeans – especially the growing unemployed – needed financial help, the reminder that US$24bil (RM87bil) of their assets had been invested abroad was jarring.
“This amount is more than the S$20.4bil (RM49.1bil) ‘Resilience Package’ unveiled in the Budget...” said online commentator Eugene Yeo.
“The obvious question that comes to mind is: If Temasek and GIC (Government Investment Corpora—tion) had not invested so much money, would we have needed to dip into our reserves?” he asked in WayangParty.com.
Using the reserves to alleviate hardship had been a frequent cry here. Instead of being greeted with relief, the move is highlighting something the government doesn’t want made common knowledge – the state’s declining assets.
How much of the reserves do we have left, some asked. One precise question is: “How much of the bad investments had been lost – or is irrecoverable – and what are the plans to protect the rest?”
In an apparent response, the authorities have assured people that state investors had reduced equities, and increasing cash to 7% of the total.
The issue of reserves worry many Singaporeans – particularly founding leader Lee Kuan Yew – as the republic’s worst ever recession deepens.
Reserves are Singapore’s life-line. Its growth has kept pace with the country’s rapid progress during the 43 years since independence.
Lee and his thrifty colleagues had been instrumental in building up much of the current reserves, virtually brick by brick in the past and almost treating them as sacrosanct.
But in the past decade, this caution had given way to a more aggressive mega-billion dollar investment policy in an effort to increase the rate of returns.
The timing and the sense of anticipation have been poor. However, the importance Lee had attached to accumulating national savings was based on sound principles.
Without natural resources and being excessively dependent on the world for trade, Singapore has always regarded building up strong reserves as crucial for survival.
By and large Singaporeans go along with this. The complaint, however, is over the excessive collection of revenue – through indirect taxes and increased costs – to make it happen.
Now, ironically, it is the severe nature of the current global crisis that shows how important savings are to Singapore.
Without it, this city state could have gone under. It has, in fact, allowed Singapore to gear up for a strong bounce back when the world recovers.
Just how strong is Singapore financially?
The official reserves are managed by GIC and Temasek Holdings. GIC had invested US$100bil (RM362.5bil) of the foreign reserves abroad, Reuters reported last April.
(Morgan Stanley, however, said in February that GIC was the world’s third-largest sovereign wealth fund with US$330bil (RM1,196bil) in assets under management, behind Abu Dhabi Investment Authority, with US$875bil (RM3,172bil), and Norway’s Government Pension Fund, with US$380bil (RM1,377bil).)
Temasek, headed by the prime minister’s wife Ho Ching, has a S$164bil (RM394.6bil) portfolio, Reuters reported.
(According to Morgan Stanley, Temasek manages S$159.2bil (RM382.6bil) and is the world’s seventh-largest sovereign wealth fund.)
Last year, the government defended these US and European banks as good strategic investments that it intended to keep for 30 years.
But some of their fundamentals had so badly deteriorated in recent months that such talk no longer resounds.
Merrill Lynch has closed and was taken into the Bank of America, which is finding its troubles run so deep that it needs the US government to help with the merger.
And Citigroup is only a pale self of what Singapore had purchased, after selling off many major assets and reverting back to being a bank.
“It’s like buying a Rolls Royce but getting a Mini-Minor,” said a trader.
Today, few well-informed Singapo—reans accept the argument that they are a good buy or will be sound, credible long-term investments.
The banking industry in the world is undergoing big changes, with the future looking less than certain.
In a few years’ time the recession will blow over, almost everyone is sure.
But no one can be equally sure that even when it happens Singapore can recover from its investment mistakes, even years after that.
I hope and pray that – as a Singaporean – events will prove me wrong.
Fed Calls Consultants to Treat AIG, Stricken Markets
By Scott Lanman and Hugh Son
Feb. 6 (Bloomberg) -- Every Sunday night, New York bankruptcy lawyer Marshall Huebner spends a 13-hour shift on call as an emergency medical technician. His day job involves work on another sort of rescue: The government’s $152.5 billion bailout of American International Group Inc.
“There’s a stronger parallel than you would think,” Huebner, a partner at Davis Polk & Wardwell, said in an interview. Helping resuscitate the insurance giant takes “a lot of the same qualities that I think stand you in very good stead with emergency medicine -- the ability to remain calm in almost any situation, and the ability to assess, triage and treat, even in a crisis.”
Huebner, 41, is part of an army of outside lawyers and consultants the Federal Reserve has called upon to help fight the biggest financial crisis in 70 years. While the central bank won’t disclose how much work it has outsourced, Fed watchers say the institution is relying on Wall Street experts to an unprecedented extent, seeking help from insiders in the very industries where the turmoil originated.
“I don’t think the Fed has seen anything like this,” former New York Fed general counsel and AIG executive Ernest Patrikis said in an interview. “AIG just got so complex in terms of private corporate matters that you just need that outside expertise.” Patrikis is now with the law firm of White & Case in New York.
In addition to hiring consultants, the Fed and the Treasury have retained Wall Street firms to help manage more than $2 trillion in bailout and emergency-loan programs.
Pimco, JPMorgan
Pacific Investment Management Co. runs a $259 billion program to backstop the commercial-paper market. BlackRock Inc., Goldman Sachs Asset Management, Pimco and Wellington Management Co. are managing the Fed’s purchases of up to $500 billion of mortgage-backed securities. JPMorgan Chase & Co. oversees a separate program under which the Fed may lend up to $540 billion to support money market mutual funds.
Morgan Stanley is also advising the Fed on the AIG rescue.
Last month, the House passed conditions for releasing the remaining $350 billion of financial-rescue funds, including a requirement that the Fed give details of the contracts and selection process for the mortgage-backed securities purchase program’s managers. The Senate isn’t planning to take up the legislation.
BlackRock is also managing and selling assets acquired in the Fed’s $29 billion rescue of Bear Stearns Cos., as well as securities called collateralized debt obligations the central bank purchased in the bailout of AIG, the largest U.S. insurer by assets.
Staff Overwhelmed
Such contracts show how the Fed’s in-house staff has been overwhelmed by new responsibilities that the central bank has taken on in handling the crisis.
“Once the government starts getting into the business of restructuring companies, there are competency deficits,” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “It’s inevitable they’ll go back to Wall Street for advice.”
Still, he said, “the man in the street would say, ‘We’re paying to fix somebody else’s mistake by paying the very people who are part of the system that produced the mistake.’”
Alabama Representative Spencer Bachus, the ranking Republican on the House Financial Services Committee, said the issue of hiring so many outsiders is a “major concern.”
Opportunity for Conflict
“It’s necessary with the magnitude of the intervention,” Bachus said in an interview. “They lack the staff internally. But that comes with opportunity for conflicts of interest. It’s a quandary.”
Before the government hired him, Huebner had represented JPMorgan in talks about organizing a private rescue of AIG that were ultimately unsuccessful. Huebner has also advised Morgan Stanley, Credit Suisse and Bank of America Corp. on derivatives and other transactions.
“It’s complicated stuff that lawyers inside the government wouldn’t do ordinarily, and the stakes are high enough you want really good, experienced counsel,” said Stephen Cutler, JPMorgan’s general counsel and former enforcement chief at the Securities and Exchange Commission.
To be sure, the Fed hasn’t outsourced all day-to-day contacts with AIG. The New York Fed has observers at all AIG board and board committee meetings. Fed employees stationed inside AIG “monitor the company’s funding, cash flows, use of proceeds and progress in pursuing its global divestiture plan,” the Fed reported to Congress in November.
No Publicity
The Fed hasn’t publicized its hiring of Davis Polk or other consultants and declined to provide information for this article.
“The Fed doesn’t participate in stories about our consultants,” New York Fed spokesman Calvin Mitchell said in an e-mail, adding the Fed doesn’t want outside advisers to use their dealings with the central bank as a marketing tool.
Before taking on the Fed’s AIG assignment, Huebner shepherded Delta Air Lines Inc. through bankruptcy in 2005 to 2007. Delta’s former general counsel, Kenneth Khoury, credits Huebner with getting the airline through the process in “near- record time.”
“He’s a brilliant lawyer, he’s a good guy and he’s a creative dealmaker,” Khoury said.
Ambulance at the Curb
As an emergency medical technician for Hatzolah, an all- volunteer emergency services and ambulance provider, Huebner spends Sunday nights on-call at his home on Manhattan’s Upper East Side, with an ambulance ready at the curb in front of the building.
“Some Sunday nights, there are no calls,” he said in the interview at his 21st-floor midtown Manhattan office, decorated with African and Asian art and photos of his wife and four daughters. “Other Sunday nights, it’s brutal.” At other times, he monitors radio calls “whenever I reasonably can.”
As a Fed consultant, Huebner often joins midnight conference calls and many days works on AIG matters at the New York Fed’s headquarters near Wall Street.
Huebner balances his Fed and AIG work with the bankruptcy of Frontier Airlines and the Minneapolis Star Tribune newspaper.
“I am expected to parachute into situations that, frequently, others have failed to figure out how to solve,” Huebner said. “You need to decide where to operate and where to cauterize.”
Geithner’s Bank Rescue May Emphasize Guarantees Over ‘Bad Bank’
By Rebecca Christie and Alison Vekshin
Feb. 6 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner’s strategy to aid the nation’s banks will likely emphasize guarantees of toxic assets over proposals to create a so-called aggregator bank that would remove them from balance sheets, according to people familiar with the plan.
The government guarantees, which might be modeled on those already given to Citigroup Inc. and Bank of America Corp., may be coupled with the purchase of preferred shares in the banks that would be later convertible into common stock, some of the people said. The aggregator bank or ‘bad bank,’ has lost favor, in part because of the potential costs involved, they added.
“Our agenda is to begin to shape the architecture of a financial recovery plan that’ll help get credit flowing again,” Geithner said before a meeting yesterday with Federal Reserve Chairman Ben S. Bernanke and other members of the President’s Working Group on Financial Markets. Geithner will announce the plan on Feb. 9.
The Obama administration has its work cut out for it. U.S. banks have already racked up $745 billion in credit losses and have warned of more to come. Shares of Bank of America, the country’s largest bank, touched a 24-year low yesterday amid concern it would be taken over by the government. The stock recovered to end the day 3 percent higher at $4.84.
The risk is that the administration’s measures will fall short of what some experts say is required to restore confidence in the financial system and get credit flowing again. Nouriel Roubini, a professor at New York University, has predicted that U.S. losses may ultimately reach $3.6 trillion.
Advocate of Action
Another advocate of dramatic action is Harvard University economist Jeremy Stein, tapped to join the White House’s National Economic Council under director Lawrence Summers.
Stein, in a September op-ed piece in the New York Times, advocated that the government act as a “deep-pocketed private investor that sees a bargain buying opportunity -- Warren Buffett on steroids” to snap up the toxic assets. He’s also called for the government to conduct tough audits of the banks and to force those who are found insolvent to close or merge.
Such a dramatic strategy isn’t likely this time, the people said. The administration, smarting over the fight in Congress over its $800 billion plus economic stimulus plan, is wary about asking lawmakers for more money now for the banks, according to some of the people.
That’s one reason why the administration looks to be backing away from setting up a giant aggregator bank to buy up the assets and at most may settle on a smaller version of that, they added.
Housing Initiative
Less than $350 billion is left to be allocated in the $700 billion bailout fund lawmakers approved last October. The administration has already pledged to use $50 billion to $100 billion of the remainder to stem a surge in home foreclosures.
The discussions on the financial rescue are fluid and will probably continue at least through tomorrow, the people said.
Banks are also pressing for the plan to include a temporary easing of mark-to-market rules that require them to reduce the value of assets they hold. The firms maintain that at least some of the assets are not that impaired, arguing that investors are being too pessimistic about their ultimate value.
Senate Banking Committee Chairman Christopher Dodd said on Feb. 3 that such a change might be needed, although he made clear yesterday that he isn’t convinced. “I haven’t embraced it yet,” the Connecticut lawmaker told reporters, adding that he intended to discuss the idea with Geithner.
Stimulus Debate
Geithner told reporters yesterday that the financial rescue package would be designed to “reinforce the recovery and reinvestment plan now working its way through Congress.”
The House has already passed an $819 billion version of the plan, while the Senate is still working on its own amidst opposition among Republicans and some fiscally conservative Democrats to the high price tag.
President Barack Obama told reporters flying with him on Air Force One that it was “important to make sure that the recovery package is of sufficient size to do what’s needed to create jobs. We lost half a million jobs each month for two consecutive quarters and things could continue to decline.”
A Labor Department report today may show that employers cut 540,000 positions in January, with the unemployment rate rising to a 16-year high of 7.5 percent, according to the median estimates of economists surveyed by Bloomberg News.
“The turn for the economy is nowhere in sight,” said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc. in New York.
Babcock Shareholders Wiped Out as Banks Force Sales
By Malcolm Scott
Feb. 6 (Bloomberg) -- Babcock & Brown Ltd. will be forced by creditors to sell all its assets to repay debt, wiping out shareholders after its strategy of buying ports and property on credit imploded as the global financial crisis deepened.
Chief Executive Officer Michael Larkin will lead the sale process and hand the proceeds to banks over the next two to three years, Sydney-based Babcock said in a statement today. The listed company, which had a peak market value of $7.8 billion, may be placed in administration and removed from the exchange, it said.
“There was too much greed and arrogance and not enough transparency,” said Tim Morris, an analyst at Sydney-based investment advisory Wise-Owl.com, the only researcher to rate Babcock’s shares a “sell” at the start of 2008. “The core of the problem was when they started repackaging assets and the only people making money was themselves. When you start burning people, it’s only a matter of time before the fire catches up with you.”
Babcock, an owner of property, ports and power stations around the world, becomes the biggest Australian casualty of the global credit crisis, topping a list that includes Allco Finance Group Ltd. and Centro Properties Group. Like Centro, Babcock averted liquidation because falling asset prices and scarce buyers makes this an unattractive option for creditors.
Australia’s five biggest banks have almost A$870 million of loans at risk with Babcock, while overseas lenders including Royal Bank of Scotland Plc have almost A$2 billion on the line, according to estimates by UBS AG. Babcock had interest-bearing debt of A$9.6 billion when it last published accounts in August.
Debt Restructure
Babcock’s holdings “across all asset classes” will be sold, with all proceeds over the amount needed to continue operating the business used to reduce debt, the company said. Creditors have agreed to a restructure of existing debt facilities, with all interest payments and approximately A$2.12 billion of principal repayments to be on a “Pay If You Can” basis.
The owner of wind farms and properties will recommence a redundancy plan announced in November, when it said it would cut headcount by almost two-thirds to 600 by 2010.
“When you pay too much for assets and you’re debt funded, you only need a very small change in circumstances to make it unviable,” said Roger Montgomery, who manages A$200 million at Clime Asset Management and avoided Babcock’s shares. “Too much debt brings forward the inevitable.”
Choking on Debt
Creditors of Centro Properties in December decided against appointing administrators after the world’s fifth-largest shopping-center owner failed to refinance A$5.1 billion of debt accumulated as it acquired 650 U.S. malls. Instead, the banks said they would take a stake of as much as 90.1 percent to pay off some of the loans.
Babcock shares, down 99 percent in 2008, have been suspended since Jan. 7 at the company’s request and last traded at 32.5 cents. The shares peaked at A$34.78 in June 2007, when the company had a market value of about A$12 billion. There will be “no value” for equity holders and “negligible or no value” for note holders after its survival plan, Babcock said in a statement on Jan. 23.
Founded in 1977 by Jim Babcock, the company sold shares at A$5 apiece in an initial public sale in October 2004. The stock surged as Babcock, copying a business model pioneered by Macquarie Group Ltd., reaped fees from managing its 11 listed investment funds amid a five-year stock market boom. That unraveled as the global credit crisis pushed up debt costs and cut asset prices.
High Leverage
“The business model was all about turnover of assets during a time of cheap credit, and quite a high amount of leverage,” said Brett Le Mesurier, an analyst at Wilson HTM in Sydney. “The stock prospered in good times, but Babcock found out the good times don’t always last.”
Jim Babcock stepped down as chairman in August and Phil Green quit as chief executive officer after the company posted a 24 percent drop in half-year profit. New CEO Larkin then embarked on a program of selling assets, firing workers and loosening ties to affiliate investment funds in an attempt to appease creditors.
The Madoff Scandal and the Future of American Jewry
Jonathan S. Tobin February 2009
Before December 11, 2008, few Americans had ever heard of Bernard L. Madoff. Yet after his arrest for running what authorities allege was the largest Ponzi scheme in history, Madoff not only achieved the sort of notoriety that is reserved for arch-criminals; he also became, in an instant, one of the most famous Jews in the world.
Madoff had been managing billions of dollars for investors who thought they were beating the market with the steady gains he reported. The profits were illusory. There was only a decades-long scam in which the “returns” of early clients were paid by the contributions of those who came later.
In the days following the revelation of the alleged $50 billion scam, the willingness of the press to refer to Madoff’s Jewishness set off alarms in a community uniquely sensitive about the way in which its members have historically been singled out for opprobrium. The theme of Jewish financial skullduggery is, after all, a familiar one in the canon of anti-Semitic invective. Madoff’s religion and his nefarious business practices were quickly intertwined by many hate-inspired Internet posters, which in turn aroused concerns at the Anti-Defamation League and the American Jewish Committee that the Madoff moment might mark the beginning of a new and uniquely dangerous wave of anti-Semitism.
But the specifically Jewish crisis that has been set off by the arrest and revelations has little to do with the rantings of anti-Semites on the Internet, who will always find something to which they can attach and insinuate their pre-existing perspective. After all, many of Madoff’s victims were not Gentiles entrapped by a wily Hebrew, but were themselves Jews.
Nor were these victims the only Jews harmed by Madoff. It soon became clear that he had caused vast sums from Jewish charities whose endowments had been invested, directly or indirectly, with Madoff’s firm to vanish. The numbers are unimaginably large. Yeshiva University, of which Madoff had served as a trustee, initially said its losses amounted to $110 million. Hadassah, the women’s Zionist organization, reported that $90 million was lost in the wreckage of Madoff’s collapse. The American Technion Society, which aids Israel’s Institute of Technology in Haifa, put its losses at $72 million. Amid a long list of other groups that have admitted to losing money were the American Jewish Congress, the Jewish Community Foundation of Los Angeles, the United Community Endowment Fund in Washington, D.C., the Elie Wiesel Foundation for Humanity, the Robert I. Lappin Foundation, and the Chais Family Foundation.
Commentary in the weeks after news of Madoff’s alleged crimes spread often centered on the way he had earned the trust and the loyalty of his dupes because of his status as a member of the tribe. Samuel G. Freedman, the New York Times veteran among whose books is the provocative Jew vs. Jew, wrote powerfully about the manner in which the power elite of Modern Orthodoxy had accepted Madoff as one of its own, even though Madoff was himself not Orthodox. According to Freedman, the connections in this insular world were intense:
Their leaders and members overlap like a sequence of Venn diagrams. They are bound by religious praxis, social connection, philanthropic causes. Yet what may be the community’s greatest virtue—its thick mesh of personal relations, its abundance of social capital—appears to have been the very trait that Mr. Madoff exploited.
The method by which Madoff ran his scam for nearly twenty years lends a certain force to this line of argument. For, unlike the legendary swindler Charles Ponzi, an Italian immigrant who gave his name to the phenomenon of the pyramid scheme, or the mysterious Augustus Melmotte, the con man who appears out of nowhere as the richest man in London and proceeds to fleece everyone in sight in Anthony Trollope’s astonishingly prescient 1875 novel, The Way We Live Now, Madoff was no outsider. Rather, he was a pillar of the worlds of New York finance and Jewish philanthropy, who like most successful Jews of his generation—he is seventy years old—rose from modest origins.
Born in Queens and educated at Hofstra University on Long Island, Madoff was only twenty-two when he formed a firm that specialized in trading stocks on the margins of the traditional market. Utilizing new technologies, he eventually grew his company into a billion-dollar business. He served for a time as chairman of the NASDAQ market and was a member of various prominent Wall Street committees.
Madoff’s firm recorded transactions. In 1989, he began a second business investing the money of others. He found his customers through informal networks of Jewish businessmen in New York, and in Jewish country clubs on Long Island and in Palm Beach (and a third in Minneapolis). His ability to operate comfortably in these social settings where his low-key approach worked best allowed him to build his reputation as a wizard with money. Madoff set himself up as the operator of an exclusive club to which only the lucky few were invited to profit from his genius. His money-management techniques, he claimed, resulted in a miraculous record of continuous profits even when the market was down. Banking on his status as an insider in the clubby atmosphere of such places, he expanded his clientele until it included not only rich men also but the charities they endowed and on whose boards they served.
There is nothing uniquely Jewish about the sort of scams that police refer to as “affinity frauds.” Such schemes have worked on a smaller scale among African-American, Hispanic, and white Baptist church groups. Criminals of all backgrounds and faiths have exploited co-religionists who trust one of their own, and have done so from time immemorial. Fewer probative questions are asked of people who prey on members of their own group, and when such questions are asked, the answers are often insufficient, as was the case whenever Madoff was asked about his methods.
No, what was unique about Madoff was the scale of his scheme, not the method of its execution. And that says more about the times in which we live than it speaks in any way to a flaw in the Jewish collective character—save, perhaps, for the flawed notion that Jews are somehow too smart to get bilked in so spectacular and embarrassing a fashion.
Some of the nonprofit organizations to which Madoff laid waste have since sought to minimize the impact of their losses by pointing out that much of their reported losses are, in fact, nothing more than fictitious profits that Madoff had claimed for them. Thus, Yeshiva University now claims that it has lost only $14.5 million. Similarly, Hadassah said that its vanished investment with Madoff was only $40 million, and the Technion Society informed its contributors that $29 million had melted into air.
The problem with downgrading the losses in this fashion is that it fails to take into account the potential honest earnings that were lost—the fact that had the money been invested with anyone else, it would probably have returned some significant degree of profit over the years that would not have vanished in an instant along with the principal.
It may be that, from the shell-shocked moment at the beginning of the Madoff scandal in which organizations overstated the pain caused them by his scheme, they have since consciously decided to play down the extent of the harm done. Perhaps it occurred to some of them that emphasizing their victimhood had the unfortunate side effect of making them look more foolish, and, perhaps, unworthy of being the recipients of further charity. No such effort to save face could help the smaller charities, such as the Wiesel, Lappin, and Chais foundations, which have been completely devastated and forced to shut down their operations. *
The future implications are not simply that many wealthy contributors in the Jewish community who have suffered serious losses will be unable to give generously to charitable causes in the future. There is, and will continue to be, a ripple effect from the Madoff scandal. Many of the groups that have been seriously hurt or no longer exist were themselves the source of funds for a variety of Jewish and non-Jewish activities. Charities that had no money of their own invested with Madoff were financially dependent on those that had. Scores of nonprofit groups designed to benefit Jews in the United States, Israel, and the former Soviet Union will now suffer profound budget cuts or worse.
Others, like the Gift of Life Bone Marrow Foundation, received a large proportion of their donations from Madoff’s own family foundation. With that source of support effectively ended, Gift of Life will not be able to expand its registry of bone-marrow donors in the coming year. Coming on the heels of a major downturn in the economy that had already had a profound effect on the volume of charitable donations in 2008, the Madoff fiasco is, as Abraham Foxman of the Anti-Defamation League put it in an interview with the Jewish Week, “the Titanic on top of a tsunami.”
There is one particular aspect of the crisis, however, that has been little discussed, in part because it might seem to blame the victim. In the past two decades, there have been remarkable changes in the manner and practice of charitable giving in the United States—changes that unwittingly exposed the world of Jewish philanthropy to the possibility of an extinction event like the Madoff fraud.
The growth of personal foundations and niche charities has multiplied the number of potential outlets for Jewish giving. As local Jewish federations and other umbrella philanthropies have learned to their sorrow, donors have become less likely to hand over their money to a central authority and let that central authority spend as it likes. This is an understandable impulse; why shouldn’t people willing to give over a substantial part of their personal fortunes to charity have the final word over the disposition of their funds?
It turns out that there might have been good reason. The self-checking redundancies that are often found within large organizations tend not to exist at smaller family or personal foundations, where there is less infrastructure and fewer procedures to govern giving and investment decisions.
In addition, the willingness of all philanthropies to, as the Wall Street Journal put it, “move away from the practice of distributing all the money they raised each year to beneficiaries and begin to invest a portion of it,” had made them more vulnerable not only to the vagaries of the stock market but also to fraud. A case in point is that of one of the most prominent of Madoff’s contacts, Jacob Ezra Merkin, a leading Wall Street figure with great influence in the Modern Orthodox community.
Merkin’s own investment firm, Ascot Partners, channeled $1.8 billion to Madoff. Merkin also gave Madoff access to the board of Yeshiva University as well as to contacts at the UJA-Federation of New York and the Fifth Avenue Synagogue, of which Merkin served as president. It is worth noting that while some large groups proved not to be immune to the sort of apparent conflict of interest that led Merkin to divert some of Yeshiva University’s funds to Madoff through his own investment firm, the New York UJA-Federation investment committee that Merkin chaired was sufficiently scrupulous to prevent a similar diversion of its moneys.
Madoff’s infamy will cause much breast-beating on the part of institutions that should have known better than to trust him. But even those groups that escaped him will now be forced to create mechanisms for greater accountability for their endowments and stricter policies of governance simply because there is less money to go around these days.
Gary Tobin of the San Francisco-based Institute for Jewish and Community Research estimates the annual amount of Jewish philanthropic giving in this country to be $5 billion. Jewish portfolios have taken the same hits as everyone else’s, and so it is fair to presume that figure will be in substantial decline over the next year or two.
Despite that, the impetus to give generously on the part of those who care about Jewish life or charitable giving in general will not disappear. The obligation to give tzedakah—the word derives from the Hebrew root for “justice”—for Jews who are influenced by their religious tradition has not been annulled by Madoff or the panic on Wall Street. If anything, the crisis set off by these events has increased the pressure on Jewish givers who are weathering the storm to give even more generously to cover the shortfalls from the combined effects of Madoff and the recession.
Perhaps this will set off a war of scarcity between Jewish groups fighting over the money of those who are still giving, but the initial indications are that cooperation may prevail over chaos. Representatives of thirty-five of the largest Jewish foundations in the country met in New York on December 23, 2008, to coordinate their responses to the crisis and agreed to offer millions of dollars in loans to not-for-profits victimized by Madoff—a heartening display of a community banding together in a time of crisis.
But the real problem facing specifically Jewish charitable organizations is not a scarcity of dollars to be spread among rival Jewish causes, but rather competition from secular groups that have also been injured by the economic crisis. An assimilated Jewish donor who feels the charitable impulse but has fewer dollars to contribute might feel a greater sense of affinity and cause with an environmentalist group or an arts organization, and focus his reduced power on them instead. Just as the openness of American society has made it less likely for Jews to marry other Jews, so, too, it is less likely that Jews will give primarily to Jewish causes.
The long-term threat for Jewish philanthropy, then, isn’t Bernard Madoff but rather the overall threat facing the larger Jewish community in the United States—what came to be known, nearly two decades ago, as the “continuity crisis.” When the 1990 National Jewish Population Study reported alarming rates of intermarriage, numbers that offered the terrifying prospect of the eventual withering away of the Jewish population in the United States, a debate began in the organized Jewish world about how to address the approaching demographic disaster.
Should Jewish organizations attempt greater outreach to increasingly secular members of the community, even or especially to those who have intermarried, to help maintain bonds of kinship and prevent their becoming just another ingredient in the multi-ethnic American soup? Or should efforts focus on reinforcing the core Jewish population, to give it succor and strength, and to keep its people and children within the fold?
Those who argue that the Jewish future can only be secured by ensuring the continued existence and flourishing of practicing, believing, involved Jews —Jews who will take it as a mission and a duty to sustain the community over the generations—have promoted greater support for Jewish education through day schools, Jewish camping, and fostering a connection to Israel through the invaluable Taglit-Birthright trips to Israel for every young American Jew who applies. Most Jewish federations and the philanthropic world in general pay lip service to these matters, but in practice have failed to make them the priority.
The results of the past two decades suggest that the outreach model is a failure; individual Jewish federations and most communal organizations have seen declines in fundraising, and what data there are indicate that these efforts have done little to renew the commitment of Jews on the margins to the community or its future. Indeed, one of the reasons that generous Jews have been so determined to bypass the larger Jewish communal organizations may well be that those organizations have been so ineffectual in addressing the concerns of committed members of the community who have wanted to use their wealth to ensure a specifically Jewish future in the United States and in Israel. The consensus-driven culture of Jewish philanthropy has, predictably, failed to make a decisive choice with respect to the future of American Jewry.
The combined crises of 2008—the financial collapse and the Madoff scandal—will certainly exacerbate this dilemma and perhaps even sharpen the debate over the allocation of dollars. But the devastating losses created by Madoff pale when set beside the more pressing concern of demographic decline and the possibility that the decline in the number of people who are interested in Jewish causes will only accelerate over time unless something is done to arrest it.
The inability of the apparatus of Jewish philanthropy to find the will to focus its existing resources on the threat posed by rising levels of assimilation dwarfs the worries generated by financial scandals, even those as serious as that of Madoff.
The pain caused by Bernard Madoff will be lasting and felt by a great many people. There can be little doubt that the method by which he used his Jewish identity to worm his way into the confidence of many Jewish investors and charities will be among the most memorable aspects of his villainy. But those concerned about the future of American Jewry have far more pressing worries than the money Madoff stole and lost or the ammunition he might have given to anti-Semites. The real question is whether, at a time when resources are growing relatively scarce, the American Jewish community will finally take the full measure of the threat to its long-term survival and husband its straitened resources to address that threat openly, honestly, and effectively.
After a stranger approached him for a job, Mohammad Salim told India’s NDTV Television he was escorted into a dark, paint-chipped room with gunmen who gave him an injection. He fainted and woke up with a pain in his side, a doctor standing over him. His kidney had been removed. The group paid him 50,000 rupees ($1,045) for the organ, but the crippling pain meant he was out of work—and in debt—for months.
That doctor, Amit Kumar, has since been arrested following a global manhunt, but the dark underworld of organ trafficking remains a big business in Asia. Kidneys around the continent fetch for between $25,000 and $60,000, and lungs and hearts are over $150,000. Yet unlike human or drug trafficking operations run by shady criminal warlords, organ trafficking operations are run by well-connected doctors in Chennai, Manila and Islamabad, and sophisticated middlemen who frequent the slums in those cities.
Medical advances, corruption, and growing poverty have all contributed to Asia’s booming organ markets, as “transplant tourists” increasingly jump waiting lists with ease to get organs in Pakistan, India, China and the Philippines. The World Health Organization suggests 10% of all transplants worldwide are trafficked. Before Pakistan passed a law in 2007 banning transplants to foreigners, the Sindh Institute of Urology and Transplantation estimated 75% of its 2000 yearly kidney transplants were to foreign medical tourists. And in China, shockingly, British medical journal The Lancet claims 90% of the organs for its 11,000 annual transplants come from executed prisoners. The government claimed in 2007 it had curbed the practice anticipating criticisms in the 2008 Beijing Olympics.
Poor people selling kidneys, or even having them taken, is nothing new. Many allegations stretch to the early 1990s, when police in Agra, India, found a clinic collecting and selling corneas and kidneys from lepers. Even in the aftermath of 2004 Banda Aceh tsunami, 150 residents claimed they had sold kidneys to escape debt and rebuild their homes. Yet their situation did not improve. Many residents, unable to work with pain in their sides, fell back into debt as post-surgery costs absorbed their kidney profits—contrary to the promises of the brokers.
With the arrests of Dr. Kumar in January, nicknamed in the press “Dr. Horror” for trafficking over 600 kidneys, and Singaporean tycoon Tang Wee Sung in September for trying to buy a $300,000 kidney, organ trafficking is no longer a sidebar on the WHO’s agenda. Its effects on communities can be devastating: the unregulated market leaves paid donors unable to work for months, without proper post-surgical treatment, and in a worse financial situation than before the operation. Many organ brokers do not follow through with their promises on payment, often leaving paid donors far less than their promised $2000, a common kidney fee.
With poor families sinking into debt, the economic crisis and last summer’s high food prices haven’t helped the situation. “Globally, dire conditions of poverty and debt are the key incentives to sell an organ,” said Debra Budiani, director of the Coalition for Organ-Failure Solutions (COFS) in Washington, D.C. “In Egypt last summer, the prices of bread more than doubled, which in tandem with unlicensed transplants, made the majority of transplants in Egypt commercial.”
Yet the coming threat may not only be a faltering economy, say doctors, but new legislation introduced in the U.S. to allow trials of financial incentive programs for donors. Under the bill, the Organ Clarification Act of 2008, organ donors could be reimbursed with anything from cash to free lifelong health insurance. And it has revived an age-old debate whether to legalize or ban organ sales, or do something in between.
“Think of it as one state like Pennsylvania adopting one measure and another state like Michigan adopting another. Would transplant donors flock to the state that provides the best sale for the donor and the cheapest price for the recipient?” said Dr. Francis Delmonico, professor of surgery at Harvard Medical School. “And in a global economy, why wouldn’t the same price differentials exist for sales in Asia or the Middle East? Why should Americans buy a kidney in Providence, if it is cheaper to purchase the kidney in Pakistan?”
A recent crackdown in Pakistan is halting the country’s once notorious kidney trafficking rings, and opponents of a regulated market point to that example. A year after the country outlawed transplants to foreigners in 2007, the total number of transplants in Pakistan fell to 700 from 2000 the previous year, said Dr. Farhat Moazam, head of the Center of Biomedical Ethics and Culture in Pakistan. “We now have only sporadic reports of unrelated, commercial transplants,” she claimed, adding that many hospitals are under investigation and one has been shut down.
Yet some physicians support U.S. trials despite events in Pakistan, claiming a regulated organ market in the developed world is the only realistic way to stop black markets in the developing world. “The legislation would send a strong message that the U.S. is opposed to organ trafficking, but also emphasizes that part of the impetus for organ trafficking is the failure of organ procurement policies to meet the growing demand,” said transplant nephrologist Dr. Ben Hippen. “When governments prohibit incentives for organ procurement, all that is accomplished is that the opportunity costs of participating in illegal, underground organ trafficking go up. But this doesn’t solve the essential problem, the shortage of organs, which is driving the demand.”
Regulated organ markets do exist. Iran can tout the world’s only regulated transplant market and abundant organ supply, with the government offering donors $1,200 and free health insurance. The government calls it organ “sharing” despite the money exchange. Middlemen and brokers are outlawed, and donors are not allowed to openly advertise their kidneys. Yet some donors, especially those with rarer blood types, still request under-the-table gifts of up to $10,000 from recipients, adding a black-market element.
Other countries, like Singapore, use presumed consent, an “opt-out of being a donor” policy different from most countries’ “opt-in” policy. Culturally speaking, Asia is prone to organ shortages, and therefore to larger black markets. Families often object to removing their deceased relatives’ organs—an interpretation of Buddhism and Islam in keeping the body whole after death. Singapore responded by adopting a presumed consent policy in its Human Organ Transplantation Act (HOTA) of 1987, meaning every citizen in a fatal accident is assumed a donor unless they opted out while alive.
Yet with its tiny population, Singaporean patients must still wait nine years for a kidney. That’s why a debate is raging in Singapore over whether to legalize organ sales, with many advocates taking a cue from the Iranian model. To some doctors, a regulated market is worrisome if the government targets the poor and vulnerable. “The Singapore initiative must be clarified as to who is the intended donor,” Dr. Delmonico said. “If it is immigrant Indonesians or Indians, that is unacceptable.”
Geoffrey Cain, a freelance journalist, followed this story for two years in Washington, D.C., and Southeast Asia.
Funds featuring managed payouts off to rocky start
Income-focused investments fall short of expectations amid downturn
By Sue Asci February 1, 2009
If timing is everything, the mutual fund industry couldn't have picked a worse time to launch managed-payout funds.
The funds, which aim to give retirees a steady stream of income, arrived on the scene in late 2007. At the time, they were hailed as a turnkey retirement plan for investors needing regular income payouts, professional money management and relatively low fees.
Seeing an opportunity to keep investors in mutual funds long after they retire, Boston-based Fidelity Investments jumped headfirst into the managed-payout-fund arena, launching 11 funds in October 2007.
The Vanguard Group Inc. of Malvern, Pa., quickly followed suit in 2008 with three managed-payout funds of its own.
Other big companies that launched managed-payout funds include John Hancock Financial Services Inc. of Boston and The Charles Schwab Corp. of San Francisco.
Since then, the stock market has plunged to abysmal lows — forcing many managed-payout funds to reduce dramatically the amount of income they were able to disburse. Making matters worse, many funds have been forced to dip into their capital to meet those payouts — meaning investors are simply spending down what they spent decades accumulating.
"These funds are dogs," said Robert Frey, founder of Professional Financial Management Inc. of Bozeman, Mont., which manages $50 million in assets. "Some of these funds are returning their own money to the investors. The chance of running out of money before you run out of time is very high."
The nation's 29 managed-payout funds held a mere $483 million in assets at the end of last year, according to Chicago-based Morningstar Inc.
"The plight of managed-payout funds dramatizes boldly what can happen to investors if they experience a serious market downturn early on, when they are starting to draw down their payments in retirement," said Dan Culloton, a fund analyst at Morningstar.
Fund companies are taking steps to prevent managed-payout funds from depleting their assets.
Three weeks ago, Vanguard announced plans to lower the monthly payout on its funds by 16% to 18%.
That means an investor with $100,000 in the Managed Payout Growth Focus Fund (VPGFX) will see their monthly payout drop to $205.90 this year, from $249.88 in 2008.
The monthly payout for the Managed Payout Distribution Focus Fund (VPDFX) dropped to $491.25, from $583.21. And the Managed Payout Growth and Distribution Fund (VPGDX) dropped to $349.33, from $416.29.
At least 90% of those payouts are coming from the funds' capital.
"Ideally, you'd like to see the payments come out of investment earnings," said John Ameriks, a principal and head of the Investment Counseling and Research Department at Vanguard. "Over the course of the last year, there have been realized losses that were more than the amount of the investment income. In that situation, you will have a return of capital."
"In poor markets, it will lower the payments," Mr. Ameriks said. "Good markets will build them back up again."
SPENDING DOWN
On the other hand, Fidelity's managed-payout funds aim to spend down all the money held by investors in the funds over a predetermined amount of time.
The 14 funds offer investors a regular payment of earnings and principal that increases over time until the assets are depleted.
The dollar value of those payouts hinges on the assets held in the fund. So while the percentage of the payout is guaranteed to increase, the dollar amount is not.
For example, an investor who has $100,000 invested in the 2042 portfolio last year received a monthly payout of $396, or 4.75% of the fund's net asset value. This year, the same investor will receive a monthly payout of $265, or 4.81%.
A similar investment in the 2016 portfolio would result in a 2009 payout of 13.52%, or $804, down from 12.20%, or $1,017, in 2008.
"You can have payout decline commensurate with your asset losses," said Jonathan Shelon, co-portfolio manager of the Fidelity funds, which had $34.1 million in assets as of Dec. 31.
Not all firms have cut payments.
John Hancock maintained the payout rates of 4% and 6% on its two managed-payout funds despite a 23% loss last year. But the payout on the John Hancock Retirement Distribution Fund (JRRAX) included a 22.55% return of capital.
John Hancock's quarterly payout rates are based on performance forecasts, said Andrew Arnott, senior vice president of product management and development.
"The worst case scenario would be a prolonged period of declining markets, and then the dividends would continue to ratchet down," Mr. Arnott said.
Managed-payout funds at Schwab are designed to preserve investors' principal. By the end of 2008, one of its three funds, the Schwab Monthly Income Fund — Maximum Payout (SWLRX) had an average yield of 4.86%, falling short of an expected range of 5% to 6%, said Patrick Waters, director of retirement investment products at Schwab.
The Schwab funds, which have $50 million in assets, do not guarantee their yields, he said.
"Theoretically you could have some months with no payout," Mr. Waters said.
Not surprisingly, many advisers are wary of managed-payout funds.
"They are a cheap replacement for an adviser," said Chuck Gibson, president of Financial Perspectives of Newark, Calif., which has $50 million in assets under management. "It will be interesting to see if these things survive."
What are the real signs and symptoms of a heart attack?
A new survey from the British Heart Foundation (BHF) found that four out of ten people get their information about heart attacks from Hollywood movies or TV dramas.
This would be a wonderful public education tool - if the fictionalized versions were accurate. Sadly, says the BHF, they are not.
The “Hollywood heart attack” is dangerously misleading and because of it, many of us ignore the real symptoms until it is too late.
In an effort to increase public awareness, the BHF screened a two-minute film called ‘Watch Your Own Heart Attack’ aired in August.
“The heart attacks you see on TV and in the movies aren’t what many of us actually experience….
“People need to understand the true story.” says David Baker of the BHF.”
The Hollywood heart attack is often depicted by a character clutching their chest prior to a dramatic collapse.
But in reality, symptoms can be very different and many ignore these tell tale signs.
Heart Attack Signs and Symptoms:
• Chest discomfort/pain – This can feel as harmless as pressure or a tight ache squeezing the center of the chest. This discomfort may come and go but episodes commonly last more than a few minutes.
• Upper body pain – It is not uncommon that your chest pain or discomfort spreads beyond your chest to your shoulders, arms, back, neck, teeth or jaw. You may experience pain in these regions without having discomfort in your chest.
• Stomach Pain - Pain may extend down into your abdominal area, this can feel similar to heartburn.
• Shortness of Breath – You may pant for breath or try to take in deep breaths. This often occurs before you develop chest discomfort.
• Anxiety – Feeling anxious or having a panic attack for no apparent reason is another tell-tale sign of a heart attack.
• Nausea and vomiting – It is possible you may start to feel sick and vomit.
• Lightheadedness - You may begin to feel dizzy or feel like you might pass out.
• Sweating – Sudden outbreaks of sweat, or cold clammy skin is also associated with heart attacks.
Although symptoms vary widely between people, there is one thing that applies to everyone, “If you are experiencing one or more of the symptoms mentioned above, call for emergency medical help immediately. Don’t waste time trying to diagnose the symptoms yourself.”
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Economic Shift Rouses Defunct Steel City
To cool the economy four years ago, the government closed private Tieben Steel and detained its founder. Times have changed.
Gong Jing and Wang Heyan, Caijing
6 February 2009
January 10 was a celebration day in Changzhou, not only because Premier Wen Jiabao paid a special visit, but also because his official stop in the winter chill may have signalled a long-sought end to a sad drama over a shuttered steel mill.
Business and economic development leaders in this city in southeastern Jiangsu Province were especially hopeful that the premier’s visit was a vindication of sorts, four years after a central government crackdown led to the detention of top executives at now-defunct Tieben Steel.
And on a broader scale, the Changzhou stop for photos and handshakes underscored the central government’s eagerness to support the private sector amid the current economic downturn.
The State Council – China’s cabinet – had expressly ordered Tieben’s shutdown in April 2004 as part of a massive, nationwide campaign to rein in what was then an overheated economy. One of the government’s slowdown measures called for halting certain, rapidly expanding private companies blamed for overzealous development.
In the process, Tieben founder Dai Guofang was detained by authorities, falling overnight from his proud position as a successful entrepreneur in Changzhou.
At that time, Premier Wen personally brought the Tieben case before the State Council and ordered local governments to punish anyone responsible for what was considered the company’s problematic expansion. In April 2004, the council halted the project and officials from nine ministries launched a probe.
A task force assigned to investigate Tieben soon determined that Dai and other executives, in their push for progress, had violated several rules, including those governing land-use rights and financing. Dai was taken into custody, and several local officials were sacked. Two years later, Dai was accused of tax fraud at a four-day trial.
But a verdict in the Dai trial has yet to be announced. And last October, after nearly four years of detention, Dai was quietly released on bail. He’s now under house arrest.
Dai and his company apparently were in the wrong place at the wrong time. But times have changed.
In the four years since Tieben’s shutdown, the economy has switched direction. No longer overheating, the economy now faces a rapid slowdown, prompting the central government to loosen what had been tight, macroeconomic controls. Ultimately, business in Changzhou may benefit.
Dai’s Cloudy Future
Dai’s lawyers had fought for bail ever since the detention began, and his surprise release – under police escort -- was considered a victory that preceded the premier’s visit by three months.
Dai’s low profile since his release is being enforced by local police. They closely watch his three-story house and reject all interview requests. Dai cannot leave his home nor welcome a visitor without a local court’s approval.
During a recent trip to Changzhou by a Caijing reporter, Dai’s mobile phone was switched off and his family members were warned not to speak with the press.
A source close to Dai said he’s determined to fully cooperate with the government and hopes to put the case behind him as soon as possible. Dai is optimistic and, if he’s freed, wants to open another steel mill, the source said.
The source also said Dai’s case has had a serious impact on his family, especially his three children. His teen-aged son, for example, dropped out of a junior high school and now spends all his time at home.
Under Chinese law, Dai’s bail period can last as long as a year. Afterward, he must be returned to custody or prosecutors must withdraw their complaint.
Tieben Crackdown
The entire steel industry including Tieben was targeted by the government in 2004 for driving the economy toward overheating. Between 2002 and ‘03, steel industry fixed asset investment rose 96 percent. It then jumped 107 percent in the first quarter 2004. Small and mid-sized steel mills were popping up across China.
But regulators considered many of the smaller mills, including Tieben, superfluous. Tieben was built with tens of billions of yuan on 1,196 acres of former farmland. Its production plan called for an annual output of 8 million tons of steel.
The government’s sudden, tough crackdown on the Changzhou business had a chilling effect on private enterprises across China. Entrepreneurs got the message, and the economy started slowing down.
The official Xinhua news agency published a long list of Tieben wrongdoings released by government investigators. But many were actually problems tied to local government officials who had gone around central government land and lending rules – thereby benefiting the steel mill -- by subdividing land and issuing project loans based on small, individual plots.
Tieben and Dai were tied to two major allegations cited by Xinhua: cooking the books to obtain bank loans, and tax fraud.
Dai’s court case led to a complicated and opaque trial that opened in March 2006. By then, prosecutors had reduced the charges to forging receipts to evade taxes, punishable by up to 10 years in jail.
One local official close to the case told Caijing that the investigation was thorough and extensive, but that neither Dai nor Tieben were ever accused of bribery. Moreover, the official said, the land and lending rule violations were mainly blamed on the local government.
Such a dilemma is common among entrepreneurs facing what are considered “mismatched” crimes and convictions in China. These entrepreneurs are brought down on charges unrelated to the crimes for which they were convicted.
Defense lawyers think even the tax fraud allegations against Dai can’t stand up to close examination, since receipts used as evidence were actually forged by one of Tieben’s upstream suppliers.
New Environment
Since Tieben’s closure, China’s steel industry – especially state-owned mills – have roared forward. Production capacity rose to nearly 500 million tons in 2008 -- almost double the 2004 level.
Some private steel mills that weathered the 2004 storm have reaped windfalls. These included the companies Shagang and Jianlong, each of which posted substantial increases in revenues and profits in recent years.
But since June, in line with the global economic slowdown, steel production has cooled. Product prices fell by half over the next eight months, and the projected demand of 200 million tons in 2009 falls far short of the industry’s 500 million ton capacity.
Unlike 2004, when the central government picked fights with local governments and private enterprises, Beijing decision-makers are now looking to build partnerships with these groups. They are seeking teamwork to shore up the economy.
In Guangdong Province, for example, the provincial judiciary has relaxed law enforcement standards, declaring that entrepreneurs accused of minor economic crimes should be shown leniency.
It may be too late for Dai and the Tieben mill, where six giant furnaces are now rusting near the banks of the Yangtze River. But the rest of Changzhou – and private business in general -- is looking hopefully toward the future of entrepreneurship.
Unease over nation’s assets
Insight Down South
By SEAH CHIANG NEE
February 7, 2009
The need to dip into foreign reserves for part of a S$20.4bil (RM49.1bil) stimulus package raises questions on the government’s global investment policy.
AS RECESSION deepens and foreign investment values tumble, the government is facing rising public pressure for information on just how badly the national reserves are faring.
Singaporeans are becoming more anxious about not knowing how much their collective savings have been lost – or tied up – in troubled investments as a result of the global market collapse.
The amount of losses has not been disclosed, except in the most general way, but market analysts believe that they are in the region of many tens of billions of dollars.
The people’s unease, which has been building up for a year, took a recent turn for the worse when the government dipped into the reserves for part of a S$20.4bil (RM49.1bil) stimulus package.
It is the first time in history that Singapore has done so, drawing out S$4.9bil (RM11.8bil), a drop in the ocean compared with total reserves believed to be more than US$200bil (RM725bil).
This was followed by a Bloomberg interview in which Singapore’s Finance Minister revealed that US$24bil (RM87bil) was invested in three of the West’s worst hit banks in the past 14 months.
The banks were UBS AG (Switzerland’s largest) and America’s Citigroup and Merrill Lynch, which was subsequently taken over by Bank of America.
Decimated, their values are still falling. Other invested equities have fallen sharply, too.
“We haven’t seen the worst yet,” warned minister Tharman Shanmugaratnam, indicating more trouble ahead for Singapore’s bank investments.
At a time when recession-hit Singaporeans – especially the growing unemployed – needed financial help, the reminder that US$24bil (RM87bil) of their assets had been invested abroad was jarring.
“This amount is more than the S$20.4bil (RM49.1bil) ‘Resilience Package’ unveiled in the Budget...” said online commentator Eugene Yeo.
“The obvious question that comes to mind is: If Temasek and GIC (Government Investment Corpora—tion) had not invested so much money, would we have needed to dip into our reserves?” he asked in WayangParty.com.
Using the reserves to alleviate hardship had been a frequent cry here. Instead of being greeted with relief, the move is highlighting something the government doesn’t want made common knowledge – the state’s declining assets.
How much of the reserves do we have left, some asked. One precise question is: “How much of the bad investments had been lost – or is irrecoverable – and what are the plans to protect the rest?”
In an apparent response, the authorities have assured people that state investors had reduced equities, and increasing cash to 7% of the total.
The issue of reserves worry many Singaporeans – particularly founding leader Lee Kuan Yew – as the republic’s worst ever recession deepens.
Reserves are Singapore’s life-line. Its growth has kept pace with the country’s rapid progress during the 43 years since independence.
Lee and his thrifty colleagues had been instrumental in building up much of the current reserves, virtually brick by brick in the past and almost treating them as sacrosanct.
But in the past decade, this caution had given way to a more aggressive mega-billion dollar investment policy in an effort to increase the rate of returns.
The timing and the sense of anticipation have been poor. However, the importance Lee had attached to accumulating national savings was based on sound principles.
Without natural resources and being excessively dependent on the world for trade, Singapore has always regarded building up strong reserves as crucial for survival.
By and large Singaporeans go along with this. The complaint, however, is over the excessive collection of revenue – through indirect taxes and increased costs – to make it happen.
Now, ironically, it is the severe nature of the current global crisis that shows how important savings are to Singapore.
Without it, this city state could have gone under. It has, in fact, allowed Singapore to gear up for a strong bounce back when the world recovers.
Just how strong is Singapore financially?
The official reserves are managed by GIC and Temasek Holdings. GIC had invested US$100bil (RM362.5bil) of the foreign reserves abroad, Reuters reported last April.
(Morgan Stanley, however, said in February that GIC was the world’s third-largest sovereign wealth fund with US$330bil (RM1,196bil) in assets under management, behind Abu Dhabi Investment Authority, with US$875bil (RM3,172bil), and Norway’s Government Pension Fund, with US$380bil (RM1,377bil).)
Temasek, headed by the prime minister’s wife Ho Ching, has a S$164bil (RM394.6bil) portfolio, Reuters reported.
(According to Morgan Stanley, Temasek manages S$159.2bil (RM382.6bil) and is the world’s seventh-largest sovereign wealth fund.)
Last year, the government defended these US and European banks as good strategic investments that it intended to keep for 30 years.
But some of their fundamentals had so badly deteriorated in recent months that such talk no longer resounds.
Merrill Lynch has closed and was taken into the Bank of America, which is finding its troubles run so deep that it needs the US government to help with the merger.
And Citigroup is only a pale self of what Singapore had purchased, after selling off many major assets and reverting back to being a bank.
“It’s like buying a Rolls Royce but getting a Mini-Minor,” said a trader.
Today, few well-informed Singapo—reans accept the argument that they are a good buy or will be sound, credible long-term investments.
The banking industry in the world is undergoing big changes, with the future looking less than certain.
In a few years’ time the recession will blow over, almost everyone is sure.
But no one can be equally sure that even when it happens Singapore can recover from its investment mistakes, even years after that.
I hope and pray that – as a Singaporean – events will prove me wrong.
Fed Calls Consultants to Treat AIG, Stricken Markets
By Scott Lanman and Hugh Son
Feb. 6 (Bloomberg) -- Every Sunday night, New York bankruptcy lawyer Marshall Huebner spends a 13-hour shift on call as an emergency medical technician. His day job involves work on another sort of rescue: The government’s $152.5 billion bailout of American International Group Inc.
“There’s a stronger parallel than you would think,” Huebner, a partner at Davis Polk & Wardwell, said in an interview. Helping resuscitate the insurance giant takes “a lot of the same qualities that I think stand you in very good stead with emergency medicine -- the ability to remain calm in almost any situation, and the ability to assess, triage and treat, even in a crisis.”
Huebner, 41, is part of an army of outside lawyers and consultants the Federal Reserve has called upon to help fight the biggest financial crisis in 70 years. While the central bank won’t disclose how much work it has outsourced, Fed watchers say the institution is relying on Wall Street experts to an unprecedented extent, seeking help from insiders in the very industries where the turmoil originated.
“I don’t think the Fed has seen anything like this,” former New York Fed general counsel and AIG executive Ernest Patrikis said in an interview. “AIG just got so complex in terms of private corporate matters that you just need that outside expertise.” Patrikis is now with the law firm of White & Case in New York.
In addition to hiring consultants, the Fed and the Treasury have retained Wall Street firms to help manage more than $2 trillion in bailout and emergency-loan programs.
Pimco, JPMorgan
Pacific Investment Management Co. runs a $259 billion program to backstop the commercial-paper market. BlackRock Inc., Goldman Sachs Asset Management, Pimco and Wellington Management Co. are managing the Fed’s purchases of up to $500 billion of mortgage-backed securities. JPMorgan Chase & Co. oversees a separate program under which the Fed may lend up to $540 billion to support money market mutual funds.
Morgan Stanley is also advising the Fed on the AIG rescue.
Last month, the House passed conditions for releasing the remaining $350 billion of financial-rescue funds, including a requirement that the Fed give details of the contracts and selection process for the mortgage-backed securities purchase program’s managers. The Senate isn’t planning to take up the legislation.
BlackRock is also managing and selling assets acquired in the Fed’s $29 billion rescue of Bear Stearns Cos., as well as securities called collateralized debt obligations the central bank purchased in the bailout of AIG, the largest U.S. insurer by assets.
Staff Overwhelmed
Such contracts show how the Fed’s in-house staff has been overwhelmed by new responsibilities that the central bank has taken on in handling the crisis.
“Once the government starts getting into the business of restructuring companies, there are competency deficits,” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “It’s inevitable they’ll go back to Wall Street for advice.”
Still, he said, “the man in the street would say, ‘We’re paying to fix somebody else’s mistake by paying the very people who are part of the system that produced the mistake.’”
Alabama Representative Spencer Bachus, the ranking Republican on the House Financial Services Committee, said the issue of hiring so many outsiders is a “major concern.”
Opportunity for Conflict
“It’s necessary with the magnitude of the intervention,” Bachus said in an interview. “They lack the staff internally. But that comes with opportunity for conflicts of interest. It’s a quandary.”
Before the government hired him, Huebner had represented JPMorgan in talks about organizing a private rescue of AIG that were ultimately unsuccessful. Huebner has also advised Morgan Stanley, Credit Suisse and Bank of America Corp. on derivatives and other transactions.
“It’s complicated stuff that lawyers inside the government wouldn’t do ordinarily, and the stakes are high enough you want really good, experienced counsel,” said Stephen Cutler, JPMorgan’s general counsel and former enforcement chief at the Securities and Exchange Commission.
To be sure, the Fed hasn’t outsourced all day-to-day contacts with AIG. The New York Fed has observers at all AIG board and board committee meetings. Fed employees stationed inside AIG “monitor the company’s funding, cash flows, use of proceeds and progress in pursuing its global divestiture plan,” the Fed reported to Congress in November.
No Publicity
The Fed hasn’t publicized its hiring of Davis Polk or other consultants and declined to provide information for this article.
“The Fed doesn’t participate in stories about our consultants,” New York Fed spokesman Calvin Mitchell said in an e-mail, adding the Fed doesn’t want outside advisers to use their dealings with the central bank as a marketing tool.
Before taking on the Fed’s AIG assignment, Huebner shepherded Delta Air Lines Inc. through bankruptcy in 2005 to 2007. Delta’s former general counsel, Kenneth Khoury, credits Huebner with getting the airline through the process in “near- record time.”
“He’s a brilliant lawyer, he’s a good guy and he’s a creative dealmaker,” Khoury said.
Ambulance at the Curb
As an emergency medical technician for Hatzolah, an all- volunteer emergency services and ambulance provider, Huebner spends Sunday nights on-call at his home on Manhattan’s Upper East Side, with an ambulance ready at the curb in front of the building.
“Some Sunday nights, there are no calls,” he said in the interview at his 21st-floor midtown Manhattan office, decorated with African and Asian art and photos of his wife and four daughters. “Other Sunday nights, it’s brutal.” At other times, he monitors radio calls “whenever I reasonably can.”
As a Fed consultant, Huebner often joins midnight conference calls and many days works on AIG matters at the New York Fed’s headquarters near Wall Street.
Huebner balances his Fed and AIG work with the bankruptcy of Frontier Airlines and the Minneapolis Star Tribune newspaper.
“I am expected to parachute into situations that, frequently, others have failed to figure out how to solve,” Huebner said. “You need to decide where to operate and where to cauterize.”
Geithner’s Bank Rescue May Emphasize Guarantees Over ‘Bad Bank’
By Rebecca Christie and Alison Vekshin
Feb. 6 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner’s strategy to aid the nation’s banks will likely emphasize guarantees of toxic assets over proposals to create a so-called aggregator bank that would remove them from balance sheets, according to people familiar with the plan.
The government guarantees, which might be modeled on those already given to Citigroup Inc. and Bank of America Corp., may be coupled with the purchase of preferred shares in the banks that would be later convertible into common stock, some of the people said. The aggregator bank or ‘bad bank,’ has lost favor, in part because of the potential costs involved, they added.
“Our agenda is to begin to shape the architecture of a financial recovery plan that’ll help get credit flowing again,” Geithner said before a meeting yesterday with Federal Reserve Chairman Ben S. Bernanke and other members of the President’s Working Group on Financial Markets. Geithner will announce the plan on Feb. 9.
The Obama administration has its work cut out for it. U.S. banks have already racked up $745 billion in credit losses and have warned of more to come. Shares of Bank of America, the country’s largest bank, touched a 24-year low yesterday amid concern it would be taken over by the government. The stock recovered to end the day 3 percent higher at $4.84.
The risk is that the administration’s measures will fall short of what some experts say is required to restore confidence in the financial system and get credit flowing again. Nouriel Roubini, a professor at New York University, has predicted that U.S. losses may ultimately reach $3.6 trillion.
Advocate of Action
Another advocate of dramatic action is Harvard University economist Jeremy Stein, tapped to join the White House’s National Economic Council under director Lawrence Summers.
Stein, in a September op-ed piece in the New York Times, advocated that the government act as a “deep-pocketed private investor that sees a bargain buying opportunity -- Warren Buffett on steroids” to snap up the toxic assets. He’s also called for the government to conduct tough audits of the banks and to force those who are found insolvent to close or merge.
Such a dramatic strategy isn’t likely this time, the people said. The administration, smarting over the fight in Congress over its $800 billion plus economic stimulus plan, is wary about asking lawmakers for more money now for the banks, according to some of the people.
That’s one reason why the administration looks to be backing away from setting up a giant aggregator bank to buy up the assets and at most may settle on a smaller version of that, they added.
Housing Initiative
Less than $350 billion is left to be allocated in the $700 billion bailout fund lawmakers approved last October. The administration has already pledged to use $50 billion to $100 billion of the remainder to stem a surge in home foreclosures.
The discussions on the financial rescue are fluid and will probably continue at least through tomorrow, the people said.
Banks are also pressing for the plan to include a temporary easing of mark-to-market rules that require them to reduce the value of assets they hold. The firms maintain that at least some of the assets are not that impaired, arguing that investors are being too pessimistic about their ultimate value.
Senate Banking Committee Chairman Christopher Dodd said on Feb. 3 that such a change might be needed, although he made clear yesterday that he isn’t convinced. “I haven’t embraced it yet,” the Connecticut lawmaker told reporters, adding that he intended to discuss the idea with Geithner.
Stimulus Debate
Geithner told reporters yesterday that the financial rescue package would be designed to “reinforce the recovery and reinvestment plan now working its way through Congress.”
The House has already passed an $819 billion version of the plan, while the Senate is still working on its own amidst opposition among Republicans and some fiscally conservative Democrats to the high price tag.
President Barack Obama told reporters flying with him on Air Force One that it was “important to make sure that the recovery package is of sufficient size to do what’s needed to create jobs. We lost half a million jobs each month for two consecutive quarters and things could continue to decline.”
A Labor Department report today may show that employers cut 540,000 positions in January, with the unemployment rate rising to a 16-year high of 7.5 percent, according to the median estimates of economists surveyed by Bloomberg News.
“The turn for the economy is nowhere in sight,” said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc. in New York.
Babcock Shareholders Wiped Out as Banks Force Sales
By Malcolm Scott
Feb. 6 (Bloomberg) -- Babcock & Brown Ltd. will be forced by creditors to sell all its assets to repay debt, wiping out shareholders after its strategy of buying ports and property on credit imploded as the global financial crisis deepened.
Chief Executive Officer Michael Larkin will lead the sale process and hand the proceeds to banks over the next two to three years, Sydney-based Babcock said in a statement today. The listed company, which had a peak market value of $7.8 billion, may be placed in administration and removed from the exchange, it said.
“There was too much greed and arrogance and not enough transparency,” said Tim Morris, an analyst at Sydney-based investment advisory Wise-Owl.com, the only researcher to rate Babcock’s shares a “sell” at the start of 2008. “The core of the problem was when they started repackaging assets and the only people making money was themselves. When you start burning people, it’s only a matter of time before the fire catches up with you.”
Babcock, an owner of property, ports and power stations around the world, becomes the biggest Australian casualty of the global credit crisis, topping a list that includes Allco Finance Group Ltd. and Centro Properties Group. Like Centro, Babcock averted liquidation because falling asset prices and scarce buyers makes this an unattractive option for creditors.
Australia’s five biggest banks have almost A$870 million of loans at risk with Babcock, while overseas lenders including Royal Bank of Scotland Plc have almost A$2 billion on the line, according to estimates by UBS AG. Babcock had interest-bearing debt of A$9.6 billion when it last published accounts in August.
Debt Restructure
Babcock’s holdings “across all asset classes” will be sold, with all proceeds over the amount needed to continue operating the business used to reduce debt, the company said. Creditors have agreed to a restructure of existing debt facilities, with all interest payments and approximately A$2.12 billion of principal repayments to be on a “Pay If You Can” basis.
The owner of wind farms and properties will recommence a redundancy plan announced in November, when it said it would cut headcount by almost two-thirds to 600 by 2010.
“When you pay too much for assets and you’re debt funded, you only need a very small change in circumstances to make it unviable,” said Roger Montgomery, who manages A$200 million at Clime Asset Management and avoided Babcock’s shares. “Too much debt brings forward the inevitable.”
Choking on Debt
Creditors of Centro Properties in December decided against appointing administrators after the world’s fifth-largest shopping-center owner failed to refinance A$5.1 billion of debt accumulated as it acquired 650 U.S. malls. Instead, the banks said they would take a stake of as much as 90.1 percent to pay off some of the loans.
Babcock shares, down 99 percent in 2008, have been suspended since Jan. 7 at the company’s request and last traded at 32.5 cents. The shares peaked at A$34.78 in June 2007, when the company had a market value of about A$12 billion. There will be “no value” for equity holders and “negligible or no value” for note holders after its survival plan, Babcock said in a statement on Jan. 23.
Founded in 1977 by Jim Babcock, the company sold shares at A$5 apiece in an initial public sale in October 2004. The stock surged as Babcock, copying a business model pioneered by Macquarie Group Ltd., reaped fees from managing its 11 listed investment funds amid a five-year stock market boom. That unraveled as the global credit crisis pushed up debt costs and cut asset prices.
High Leverage
“The business model was all about turnover of assets during a time of cheap credit, and quite a high amount of leverage,” said Brett Le Mesurier, an analyst at Wilson HTM in Sydney. “The stock prospered in good times, but Babcock found out the good times don’t always last.”
Jim Babcock stepped down as chairman in August and Phil Green quit as chief executive officer after the company posted a 24 percent drop in half-year profit. New CEO Larkin then embarked on a program of selling assets, firing workers and loosening ties to affiliate investment funds in an attempt to appease creditors.
The Madoff Scandal and the Future of American Jewry
Jonathan S. Tobin
February 2009
Before December 11, 2008, few Americans had ever heard of Bernard L. Madoff. Yet after his arrest for running what authorities allege was the largest Ponzi scheme in history, Madoff not only achieved the sort of notoriety that is reserved for arch-criminals; he also became, in an instant, one of the most famous Jews in the world.
Madoff had been managing billions of dollars for investors who thought they were beating the market with the steady gains he reported. The profits were illusory. There was only a decades-long scam in which the “returns” of early clients were paid by the contributions of those who came later.
In the days following the revelation of the alleged $50 billion scam, the willingness of the press to refer to Madoff’s Jewishness set off alarms in a community uniquely sensitive about the way in which its members have historically been singled out for opprobrium. The theme of Jewish financial skullduggery is, after all, a familiar one in the canon of anti-Semitic invective. Madoff’s religion and his nefarious business practices were quickly intertwined by many hate-inspired Internet posters, which in turn aroused concerns at the Anti-Defamation League and the American Jewish Committee that the Madoff moment might mark the beginning of a new and uniquely dangerous wave of anti-Semitism.
But the specifically Jewish crisis that has been set off by the arrest and revelations has little to do with the rantings of anti-Semites on the Internet, who will always find something to which they can attach and insinuate their pre-existing perspective. After all, many of Madoff’s victims were not Gentiles entrapped by a wily Hebrew, but were themselves Jews.
Nor were these victims the only Jews harmed by Madoff. It soon became clear that he had caused vast sums from Jewish charities whose endowments had been invested, directly or indirectly, with Madoff’s firm to vanish. The numbers are unimaginably large. Yeshiva University, of which Madoff had served as a trustee, initially said its losses amounted to $110 million. Hadassah, the women’s Zionist organization, reported that $90 million was lost in the wreckage of Madoff’s collapse. The American Technion Society, which aids Israel’s Institute of Technology in Haifa, put its losses at $72 million. Amid a long list of other groups that have admitted to losing money were the American Jewish Congress, the Jewish Community Foundation of Los Angeles, the United Community Endowment Fund in Washington, D.C., the Elie Wiesel Foundation for Humanity, the Robert I. Lappin Foundation, and the Chais Family Foundation.
Commentary in the weeks after news of Madoff’s alleged crimes spread often centered on the way he had earned the trust and the loyalty of his dupes because of his status as a member of the tribe. Samuel G. Freedman, the New York Times veteran among whose books is the provocative Jew vs. Jew, wrote powerfully about the manner in which the power elite of Modern Orthodoxy had accepted Madoff as one of its own, even though Madoff was himself not Orthodox. According to Freedman, the connections in this insular world were intense:
Their leaders and members overlap like a sequence of Venn diagrams. They are bound by religious praxis, social connection, philanthropic causes. Yet what may be the community’s greatest virtue—its thick mesh of personal relations, its abundance of social capital—appears to have been the very trait that Mr. Madoff exploited.
The method by which Madoff ran his scam for nearly twenty years lends a certain force to this line of argument. For, unlike the legendary swindler Charles Ponzi, an Italian immigrant who gave his name to the phenomenon of the pyramid scheme, or the mysterious Augustus Melmotte, the con man who appears out of nowhere as the richest man in London and proceeds to fleece everyone in sight in Anthony Trollope’s astonishingly prescient 1875 novel, The Way We Live Now, Madoff was no outsider. Rather, he was a pillar of the worlds of New York finance and Jewish philanthropy, who like most successful Jews of his generation—he is seventy years old—rose from modest origins.
Born in Queens and educated at Hofstra University on Long Island, Madoff was only twenty-two when he formed a firm that specialized in trading stocks on the margins of the traditional market. Utilizing new technologies, he eventually grew his company into a billion-dollar business. He served for a time as chairman of the NASDAQ market and was a member of various prominent Wall Street committees.
Madoff’s firm recorded transactions. In 1989, he began a second business investing the money of others. He found his customers through informal networks of Jewish businessmen in New York, and in Jewish country clubs on Long Island and in Palm Beach (and a third in Minneapolis). His ability to operate comfortably in these social settings where his low-key approach worked best allowed him to build his reputation as a wizard with money. Madoff set himself up as the operator of an exclusive club to which only the lucky few were invited to profit from his genius. His money-management techniques, he claimed, resulted in a miraculous record of continuous profits even when the market was down. Banking on his status as an insider in the clubby atmosphere of such places, he expanded his clientele until it included not only rich men also but the charities they endowed and on whose boards they served.
There is nothing uniquely Jewish about the sort of scams that police refer to as “affinity frauds.” Such schemes have worked on a smaller scale among African-American, Hispanic, and white Baptist church groups. Criminals of all backgrounds and faiths have exploited co-religionists who trust one of their own, and have done so from time immemorial. Fewer probative questions are asked of people who prey on members of their own group, and when such questions are asked, the answers are often insufficient, as was the case whenever Madoff was asked about his methods.
No, what was unique about Madoff was the scale of his scheme, not the method of its execution. And that says more about the times in which we live than it speaks in any way to a flaw in the Jewish collective character—save, perhaps, for the flawed notion that Jews are somehow too smart to get bilked in so spectacular and embarrassing a fashion.
Some of the nonprofit organizations to which Madoff laid waste have since sought to minimize the impact of their losses by pointing out that much of their reported losses are, in fact, nothing more than fictitious profits that Madoff had claimed for them. Thus, Yeshiva University now claims that it has lost only $14.5 million. Similarly, Hadassah said that its vanished investment with Madoff was only $40 million, and the Technion Society informed its contributors that $29 million had melted into air.
The problem with downgrading the losses in this fashion is that it fails to take into account the potential honest earnings that were lost—the fact that had the money been invested with anyone else, it would probably have returned some significant degree of profit over the years that would not have vanished in an instant along with the principal.
It may be that, from the shell-shocked moment at the beginning of the Madoff scandal in which organizations overstated the pain caused them by his scheme, they have since consciously decided to play down the extent of the harm done. Perhaps it occurred to some of them that emphasizing their victimhood had the unfortunate side effect of making them look more foolish, and, perhaps, unworthy of being the recipients of further charity. No such effort to save face could help the smaller charities, such as the Wiesel, Lappin, and Chais foundations, which have been completely devastated and forced to shut down their operations. *
The future implications are not simply that many wealthy contributors in the Jewish community who have suffered serious losses will be unable to give generously to charitable causes in the future. There is, and will continue to be, a ripple effect from the Madoff scandal. Many of the groups that have been seriously hurt or no longer exist were themselves the source of funds for a variety of Jewish and non-Jewish activities. Charities that had no money of their own invested with Madoff were financially dependent on those that had. Scores of nonprofit groups designed to benefit Jews in the United States, Israel, and the former Soviet Union will now suffer profound budget cuts or worse.
Others, like the Gift of Life Bone Marrow Foundation, received a large proportion of their donations from Madoff’s own family foundation. With that source of support effectively ended, Gift of Life will not be able to expand its registry of bone-marrow donors in the coming year. Coming on the heels of a major downturn in the economy that had already had a profound effect on the volume of charitable donations in 2008, the Madoff fiasco is, as Abraham Foxman of the Anti-Defamation League put it in an interview with the Jewish Week, “the Titanic on top of a tsunami.”
There is one particular aspect of the crisis, however, that has been little discussed, in part because it might seem to blame the victim. In the past two decades, there have been remarkable changes in the manner and practice of charitable giving in the United States—changes that unwittingly exposed the world of Jewish philanthropy to the possibility of an extinction event like the Madoff fraud.
The growth of personal foundations and niche charities has multiplied the number of potential outlets for Jewish giving. As local Jewish federations and other umbrella philanthropies have learned to their sorrow, donors have become less likely to hand over their money to a central authority and let that central authority spend as it likes. This is an understandable impulse; why shouldn’t people willing to give over a substantial part of their personal fortunes to charity have the final word over the disposition of their funds?
It turns out that there might have been good reason. The self-checking redundancies that are often found within large organizations tend not to exist at smaller family or personal foundations, where there is less infrastructure and fewer procedures to govern giving and investment decisions.
In addition, the willingness of all philanthropies to, as the Wall Street Journal put it, “move away from the practice of distributing all the money they raised each year to beneficiaries and begin to invest a portion of it,” had made them more vulnerable not only to the vagaries of the stock market but also to fraud. A case in point is that of one of the most prominent of Madoff’s contacts, Jacob Ezra Merkin, a leading Wall Street figure with great influence in the Modern Orthodox community.
Merkin’s own investment firm, Ascot Partners, channeled $1.8 billion to Madoff. Merkin also gave Madoff access to the board of Yeshiva University as well as to contacts at the UJA-Federation of New York and the Fifth Avenue Synagogue, of which Merkin served as president. It is worth noting that while some large groups proved not to be immune to the sort of apparent conflict of interest that led Merkin to divert some of Yeshiva University’s funds to Madoff through his own investment firm, the New York UJA-Federation investment committee that Merkin chaired was sufficiently scrupulous to prevent a similar diversion of its moneys.
Madoff’s infamy will cause much breast-beating on the part of institutions that should have known better than to trust him. But even those groups that escaped him will now be forced to create mechanisms for greater accountability for their endowments and stricter policies of governance simply because there is less money to go around these days.
Gary Tobin of the San Francisco-based Institute for Jewish and Community Research estimates the annual amount of Jewish philanthropic giving in this country to be $5 billion. Jewish portfolios have taken the same hits as everyone else’s, and so it is fair to presume that figure will be in substantial decline over the next year or two.
Despite that, the impetus to give generously on the part of those who care about Jewish life or charitable giving in general will not disappear. The obligation to give tzedakah—the word derives from the Hebrew root for “justice”—for Jews who are influenced by their religious tradition has not been annulled by Madoff or the panic on Wall Street. If anything, the crisis set off by these events has increased the pressure on Jewish givers who are weathering the storm to give even more generously to cover the shortfalls from the combined effects of Madoff and the recession.
Perhaps this will set off a war of scarcity between Jewish groups fighting over the money of those who are still giving, but the initial indications are that cooperation may prevail over chaos. Representatives of thirty-five of the largest Jewish foundations in the country met in New York on December 23, 2008, to coordinate their responses to the crisis and agreed to offer millions of dollars in loans to not-for-profits victimized by Madoff—a heartening display of a community banding together in a time of crisis.
But the real problem facing specifically Jewish charitable organizations is not a scarcity of dollars to be spread among rival Jewish causes, but rather competition from secular groups that have also been injured by the economic crisis. An assimilated Jewish donor who feels the charitable impulse but has fewer dollars to contribute might feel a greater sense of affinity and cause with an environmentalist group or an arts organization, and focus his reduced power on them instead. Just as the openness of American society has made it less likely for Jews to marry other Jews, so, too, it is less likely that Jews will give primarily to Jewish causes.
The long-term threat for Jewish philanthropy, then, isn’t Bernard Madoff but rather the overall threat facing the larger Jewish community in the United States—what came to be known, nearly two decades ago, as the “continuity crisis.” When the 1990 National Jewish Population Study reported alarming rates of intermarriage, numbers that offered the terrifying prospect of the eventual withering away of the Jewish population in the United States, a debate began in the organized Jewish world about how to address the approaching demographic disaster.
Should Jewish organizations attempt greater outreach to increasingly secular members of the community, even or especially to those who have intermarried, to help maintain bonds of kinship and prevent their becoming just another ingredient in the multi-ethnic American soup? Or should efforts focus on reinforcing the core Jewish population, to give it succor and strength, and to keep its people and children within the fold?
Those who argue that the Jewish future can only be secured by ensuring the continued existence and flourishing of practicing, believing, involved Jews —Jews who will take it as a mission and a duty to sustain the community over the generations—have promoted greater support for Jewish education through day schools, Jewish camping, and fostering a connection to Israel through the invaluable Taglit-Birthright trips to Israel for every young American Jew who applies. Most Jewish federations and the philanthropic world in general pay lip service to these matters, but in practice have failed to make them the priority.
The results of the past two decades suggest that the outreach model is a failure; individual Jewish federations and most communal organizations have seen declines in fundraising, and what data there are indicate that these efforts have done little to renew the commitment of Jews on the margins to the community or its future. Indeed, one of the reasons that generous Jews have been so determined to bypass the larger Jewish communal organizations may well be that those organizations have been so ineffectual in addressing the concerns of committed members of the community who have wanted to use their wealth to ensure a specifically Jewish future in the United States and in Israel. The consensus-driven culture of Jewish philanthropy has, predictably, failed to make a decisive choice with respect to the future of American Jewry.
The combined crises of 2008—the financial collapse and the Madoff scandal—will certainly exacerbate this dilemma and perhaps even sharpen the debate over the allocation of dollars. But the devastating losses created by Madoff pale when set beside the more pressing concern of demographic decline and the possibility that the decline in the number of people who are interested in Jewish causes will only accelerate over time unless something is done to arrest it.
The inability of the apparatus of Jewish philanthropy to find the will to focus its existing resources on the threat posed by rising levels of assimilation dwarfs the worries generated by financial scandals, even those as serious as that of Madoff.
The pain caused by Bernard Madoff will be lasting and felt by a great many people. There can be little doubt that the method by which he used his Jewish identity to worm his way into the confidence of many Jewish investors and charities will be among the most memorable aspects of his villainy. But those concerned about the future of American Jewry have far more pressing worries than the money Madoff stole and lost or the ammunition he might have given to anti-Semites. The real question is whether, at a time when resources are growing relatively scarce, the American Jewish community will finally take the full measure of the threat to its long-term survival and husband its straitened resources to address that threat openly, honestly, and effectively.
Asia's Kidney Bazaars
by Geoffrey Cain
January 6, 2009
After a stranger approached him for a job, Mohammad Salim told India’s NDTV Television he was escorted into a dark, paint-chipped room with gunmen who gave him an injection. He fainted and woke up with a pain in his side, a doctor standing over him. His kidney had been removed. The group paid him 50,000 rupees ($1,045) for the organ, but the crippling pain meant he was out of work—and in debt—for months.
That doctor, Amit Kumar, has since been arrested following a global manhunt, but the dark underworld of organ trafficking remains a big business in Asia. Kidneys around the continent fetch for between $25,000 and $60,000, and lungs and hearts are over $150,000. Yet unlike human or drug trafficking operations run by shady criminal warlords, organ trafficking operations are run by well-connected doctors in Chennai, Manila and Islamabad, and sophisticated middlemen who frequent the slums in those cities.
Medical advances, corruption, and growing poverty have all contributed to Asia’s booming organ markets, as “transplant tourists” increasingly jump waiting lists with ease to get organs in Pakistan, India, China and the Philippines. The World Health Organization suggests 10% of all transplants worldwide are trafficked. Before Pakistan passed a law in 2007 banning transplants to foreigners, the Sindh Institute of Urology and Transplantation estimated 75% of its 2000 yearly kidney transplants were to foreign medical tourists. And in China, shockingly, British medical journal The Lancet claims 90% of the organs for its 11,000 annual transplants come from executed prisoners. The government claimed in 2007 it had curbed the practice anticipating criticisms in the 2008 Beijing Olympics.
Poor people selling kidneys, or even having them taken, is nothing new. Many allegations stretch to the early 1990s, when police in Agra, India, found a clinic collecting and selling corneas and kidneys from lepers. Even in the aftermath of 2004 Banda Aceh tsunami, 150 residents claimed they had sold kidneys to escape debt and rebuild their homes. Yet their situation did not improve. Many residents, unable to work with pain in their sides, fell back into debt as post-surgery costs absorbed their kidney profits—contrary to the promises of the brokers.
With the arrests of Dr. Kumar in January, nicknamed in the press “Dr. Horror” for trafficking over 600 kidneys, and Singaporean tycoon Tang Wee Sung in September for trying to buy a $300,000 kidney, organ trafficking is no longer a sidebar on the WHO’s agenda. Its effects on communities can be devastating: the unregulated market leaves paid donors unable to work for months, without proper post-surgical treatment, and in a worse financial situation than before the operation. Many organ brokers do not follow through with their promises on payment, often leaving paid donors far less than their promised $2000, a common kidney fee.
With poor families sinking into debt, the economic crisis and last summer’s high food prices haven’t helped the situation. “Globally, dire conditions of poverty and debt are the key incentives to sell an organ,” said Debra Budiani, director of the Coalition for Organ-Failure Solutions (COFS) in Washington, D.C. “In Egypt last summer, the prices of bread more than doubled, which in tandem with unlicensed transplants, made the majority of transplants in Egypt commercial.”
Yet the coming threat may not only be a faltering economy, say doctors, but new legislation introduced in the U.S. to allow trials of financial incentive programs for donors. Under the bill, the Organ Clarification Act of 2008, organ donors could be reimbursed with anything from cash to free lifelong health insurance. And it has revived an age-old debate whether to legalize or ban organ sales, or do something in between.
“Think of it as one state like Pennsylvania adopting one measure and another state like Michigan adopting another. Would transplant donors flock to the state that provides the best sale for the donor and the cheapest price for the recipient?” said Dr. Francis Delmonico, professor of surgery at Harvard Medical School. “And in a global economy, why wouldn’t the same price differentials exist for sales in Asia or the Middle East? Why should Americans buy a kidney in Providence, if it is cheaper to purchase the kidney in Pakistan?”
A recent crackdown in Pakistan is halting the country’s once notorious kidney trafficking rings, and opponents of a regulated market point to that example. A year after the country outlawed transplants to foreigners in 2007, the total number of transplants in Pakistan fell to 700 from 2000 the previous year, said Dr. Farhat Moazam, head of the Center of Biomedical Ethics and Culture in Pakistan. “We now have only sporadic reports of unrelated, commercial transplants,” she claimed, adding that many hospitals are under investigation and one has been shut down.
Yet some physicians support U.S. trials despite events in Pakistan, claiming a regulated organ market in the developed world is the only realistic way to stop black markets in the developing world. “The legislation would send a strong message that the U.S. is opposed to organ trafficking, but also emphasizes that part of the impetus for organ trafficking is the failure of organ procurement policies to meet the growing demand,” said transplant nephrologist Dr. Ben Hippen. “When governments prohibit incentives for organ procurement, all that is accomplished is that the opportunity costs of participating in illegal, underground organ trafficking go up. But this doesn’t solve the essential problem, the shortage of organs, which is driving the demand.”
Regulated organ markets do exist. Iran can tout the world’s only regulated transplant market and abundant organ supply, with the government offering donors $1,200 and free health insurance. The government calls it organ “sharing” despite the money exchange. Middlemen and brokers are outlawed, and donors are not allowed to openly advertise their kidneys. Yet some donors, especially those with rarer blood types, still request under-the-table gifts of up to $10,000 from recipients, adding a black-market element.
Other countries, like Singapore, use presumed consent, an “opt-out of being a donor” policy different from most countries’ “opt-in” policy. Culturally speaking, Asia is prone to organ shortages, and therefore to larger black markets. Families often object to removing their deceased relatives’ organs—an interpretation of Buddhism and Islam in keeping the body whole after death. Singapore responded by adopting a presumed consent policy in its Human Organ Transplantation Act (HOTA) of 1987, meaning every citizen in a fatal accident is assumed a donor unless they opted out while alive.
Yet with its tiny population, Singaporean patients must still wait nine years for a kidney. That’s why a debate is raging in Singapore over whether to legalize organ sales, with many advocates taking a cue from the Iranian model. To some doctors, a regulated market is worrisome if the government targets the poor and vulnerable. “The Singapore initiative must be clarified as to who is the intended donor,” Dr. Delmonico said. “If it is immigrant Indonesians or Indians, that is unacceptable.”
Geoffrey Cain, a freelance journalist, followed this story for two years in Washington, D.C., and Southeast Asia.
Funds featuring managed payouts off to rocky start
Income-focused investments fall short of expectations amid downturn
By Sue Asci
February 1, 2009
If timing is everything, the mutual fund industry couldn't have picked a worse time to launch managed-payout funds.
The funds, which aim to give retirees a steady stream of income, arrived on the scene in late 2007. At the time, they were hailed as a turnkey retirement plan for investors needing regular income payouts, professional money management and relatively low fees.
Seeing an opportunity to keep investors in mutual funds long after they retire, Boston-based Fidelity Investments jumped headfirst into the managed-payout-fund arena, launching 11 funds in October 2007.
The Vanguard Group Inc. of Malvern, Pa., quickly followed suit in 2008 with three managed-payout funds of its own.
Other big companies that launched managed-payout funds include John Hancock Financial Services Inc. of Boston and The Charles Schwab Corp. of San Francisco.
Since then, the stock market has plunged to abysmal lows — forcing many managed-payout funds to reduce dramatically the amount of income they were able to disburse. Making matters worse, many funds have been forced to dip into their capital to meet those payouts — meaning investors are simply spending down what they spent decades accumulating.
"These funds are dogs," said Robert Frey, founder of Professional Financial Management Inc. of Bozeman, Mont., which manages $50 million in assets. "Some of these funds are returning their own money to the investors. The chance of running out of money before you run out of time is very high."
The nation's 29 managed-payout funds held a mere $483 million in assets at the end of last year, according to Chicago-based Morningstar Inc.
"The plight of managed-payout funds dramatizes boldly what can happen to investors if they experience a serious market downturn early on, when they are starting to draw down their payments in retirement," said Dan Culloton, a fund analyst at Morningstar.
Fund companies are taking steps to prevent managed-payout funds from depleting their assets.
Three weeks ago, Vanguard announced plans to lower the monthly payout on its funds by 16% to 18%.
That means an investor with $100,000 in the Managed Payout Growth Focus Fund (VPGFX) will see their monthly payout drop to $205.90 this year, from $249.88 in 2008.
The monthly payout for the Managed Payout Distribution Focus Fund (VPDFX) dropped to $491.25, from $583.21. And the Managed Payout Growth and Distribution Fund (VPGDX) dropped to $349.33, from $416.29.
At least 90% of those payouts are coming from the funds' capital.
"Ideally, you'd like to see the payments come out of investment earnings," said John Ameriks, a principal and head of the Investment Counseling and Research Department at Vanguard. "Over the course of the last year, there have been realized losses that were more than the amount of the investment income. In that situation, you will have a return of capital."
"In poor markets, it will lower the payments," Mr. Ameriks said. "Good markets will build them back up again."
SPENDING DOWN
On the other hand, Fidelity's managed-payout funds aim to spend down all the money held by investors in the funds over a predetermined amount of time.
The 14 funds offer investors a regular payment of earnings and principal that increases over time until the assets are depleted.
The dollar value of those payouts hinges on the assets held in the fund. So while the percentage of the payout is guaranteed to increase, the dollar amount is not.
For example, an investor who has $100,000 invested in the 2042 portfolio last year received a monthly payout of $396, or 4.75% of the fund's net asset value. This year, the same investor will receive a monthly payout of $265, or 4.81%.
A similar investment in the 2016 portfolio would result in a 2009 payout of 13.52%, or $804, down from 12.20%, or $1,017, in 2008.
"You can have payout decline commensurate with your asset losses," said Jonathan Shelon, co-portfolio manager of the Fidelity funds, which had $34.1 million in assets as of Dec. 31.
Not all firms have cut payments.
John Hancock maintained the payout rates of 4% and 6% on its two managed-payout funds despite a 23% loss last year. But the payout on the John Hancock Retirement Distribution Fund (JRRAX) included a 22.55% return of capital.
John Hancock's quarterly payout rates are based on performance forecasts, said Andrew Arnott, senior vice president of product management and development.
"The worst case scenario would be a prolonged period of declining markets, and then the dividends would continue to ratchet down," Mr. Arnott said.
Managed-payout funds at Schwab are designed to preserve investors' principal. By the end of 2008, one of its three funds, the Schwab Monthly Income Fund — Maximum Payout (SWLRX) had an average yield of 4.86%, falling short of an expected range of 5% to 6%, said Patrick Waters, director of retirement investment products at Schwab.
The Schwab funds, which have $50 million in assets, do not guarantee their yields, he said.
"Theoretically you could have some months with no payout," Mr. Waters said.
Not surprisingly, many advisers are wary of managed-payout funds.
"They are a cheap replacement for an adviser," said Chuck Gibson, president of Financial Perspectives of Newark, Calif., which has $50 million in assets under management. "It will be interesting to see if these things survive."
What Does A Heart Attack Really Feel Like?
What are the real signs and symptoms of a heart attack?
A new survey from the British Heart Foundation (BHF) found that four out of ten people get their information about heart attacks from Hollywood movies or TV dramas.
This would be a wonderful public education tool - if the fictionalized versions were accurate. Sadly, says the BHF, they are not.
The “Hollywood heart attack” is dangerously misleading and because of it, many of us ignore the real symptoms until it is too late.
In an effort to increase public awareness, the BHF screened a two-minute film called ‘Watch Your Own Heart Attack’ aired in August.
“The heart attacks you see on TV and in the movies aren’t what many of us actually experience….
“People need to understand the true story.” says David Baker of the BHF.”
The Hollywood heart attack is often depicted by a character clutching their chest prior to a dramatic collapse.
But in reality, symptoms can be very different and many ignore these tell tale signs.
Heart Attack Signs and Symptoms:
• Chest discomfort/pain – This can feel as harmless as pressure or a tight ache squeezing the center of the chest. This discomfort may come and go but episodes commonly last more than a few minutes.
• Upper body pain – It is not uncommon that your chest pain or discomfort spreads beyond your chest to your shoulders, arms, back, neck, teeth or jaw. You may experience pain in these regions without having discomfort in your chest.
• Stomach Pain - Pain may extend down into your abdominal area, this can feel similar to heartburn.
• Shortness of Breath – You may pant for breath or try to take in deep breaths. This often occurs before you develop chest discomfort.
• Anxiety – Feeling anxious or having a panic attack for no apparent reason is another tell-tale sign of a heart attack.
• Nausea and vomiting – It is possible you may start to feel sick and vomit.
• Lightheadedness - You may begin to feel dizzy or feel like you might pass out.
• Sweating – Sudden outbreaks of sweat, or cold clammy skin is also associated with heart attacks.
Although symptoms vary widely between people, there is one thing that applies to everyone, “If you are experiencing one or more of the symptoms mentioned above, call for emergency medical help immediately. Don’t waste time trying to diagnose the symptoms yourself.”
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