Red Notice

The Book of the Week is “Red Notice, A True Story of High Finance, Murder and One Man’s Fight For Justice” by Bill Browder, published in 2015. This suspenseful, emotional saga should be made into a motion picture, as it is not only entertaining and engaging, but is a comprehensive picture of the extremes of human nature.

Rebelling against his left wing intellectual family, Browder became a capitalist. During his career, he worked under two big bosses who died under mysterious, suspicious circumstances– Bob Maxwell and Edmond Safra. As a young whippersnapper, he longed to do investment consulting in Eastern Europe, but had to settle for London. Browder got in on the ground floor when the Russian securities industry was in its infancy in the early 1990’s.

In early 2000, the power of Russian Federation president Vladimir Putin, was actually held by “… oligarchs, regional governors, and organized-crime groups.” Browder started a hedge fund called Hermitage. What with complex economic and political goings-on, his hedge fund became the victim of the Russian mentality. In 2006, Hermitage had to “… sell billions of dollars worth of Russian securities without anyone knowing.” That was just one of many traumatic episodes in Browder’s career.

The author had the brains and skills to become not only a successful financial consultant and investor, but a muckraker; however, this made him a “Darwin Award” candidate. He became involved in a true thriller with intrigue, greed, power hunger, human rights abuses and karma. Russia struck at his attorney, Sergei Magnitsky. Numerous Russians in positions of authority– in the government, prisons, the police– all lied to the world about what happened to Magnitsky. Under Putin’s rule, Russia had reverted to the Stalinism of the 1920’s, with thousands of dissidents tortured and killed.

The few people whose eyes were open, who were raising the alarm– were risking their own lives. The rest of the world didn’t want to get involved because they were of the mentality that the violence was confined to Russia, and it wouldn’t spread to them. And they might end up like those dissidents if they rocked the boat. Besides, in the 2000’s, people have become desensitized to human rights abuses due to the widespread, propagandized publicizing of them (like video clips arousing viewers’ morbid curiosity, of the alleged beheadings of journalists by Middle Easterners on YouTube).

(Please excuse the legalese in this paragraph- but it is the briefest way of explanation) Some people would say that Browder had “unclean hands” and there was “contributory negliglence” on his part, so his story should not have deserved the special attention it got. Admittedly, he was out for revenge, not because he truly wanted to stem uncivil behavior in the world. He made his living in an industry full of greedy people whose scruples are less than stellar– securities. He made a ton of money by engaging in “self-dealing” and insider trading, which would be considered violations of American securities laws. He was from America, the country that gave rise to the corrupt economic system in Russia in the first place. It might be recalled that Harvard economist Jeffrey Sachs gave bad advice to Boris Yeltsin (to put it generously), convincing him to adopt “shock capitalism” — a ruinous financial plan. Lastly, Browder had “constructive knowledge” that doing business in Russia was especially risky (not just financially), compared to other countries. Arguably, he was trying to apply American morals and laws to get justice in a situation in which he had profited from Russian morals and lawlessness. Some people would say, “Pox on everyone’s house.”

Browder wrote, “There was something almost biblical about Sergei’s story, and even though I am not a religious man, as I sat there watching history unfold, I couldn’t help but feel that God had intervened in this case.” This blogger thinks that, but for Browder’s powerful professional and political contacts who intervened in this case, it would be just another infuriating, depressing, suppressed, and eventually forgotten human rights abuse story.

Read the book to learn the details of the story, including the actions taken against the morally bankrupt, brazen Russian criminals, and learn whether justice was done.

The Antidote

The Book of the Week is “The Antidote” by Barry Werth, published in 2014. This suspenseful saga is about the public drug company, Vertex.

Vertex has created the core substances in drugs that treat niche diseases, such as hepatitis C and cystic fibrosis. It has partnered with various other drug companies to use their resources.

Unconventionally, in the 1990’s, Vertex’s employees were organized into teams working on protein targets rather than those working on different diseases. The company’s teams were demoralized when they failed month after month to come up with a successful molecule.

The cost of American drugs is so high not just because the drugmakers are greedy, but because their employees feel entitled to a large reward for creating an effective product that does minimal harm to patients. They take tremendous risks– acquire pricey, extensive educations in organic chemistry and such, working long daily hours, suffer loads of stress from dealing with grant applications, patent disputes, licensing issues, doctor-insurer issues, undergoing the rigorous process of seeking FDA approval after laboring months or years on a drug substance– possibly applying for approval at the same time as another company with a competing product, and face the possibility of being laid off anytime. This is why life-saving, life-prolonging medicines are astronomically expensive. However, the drugs would not exist, but for the necessary evil of a greed machine that raises the funds to pay for the price of creating them.

Vertex posted a “profit” of more than $2 million in the fourth quarter of 1993, even though it had yet to sell even one pill. Its financial arrangements with its partners allowed it to claim that its income exceeded its expenses. By the end of the 1990’s, however, there were still no actual drugs produced, and the company was likely many years and hundreds of millions of dollars from the market. It was thus a likely takeover target. Some of Vertex’s scientists and lawyers became avid day-traders of the company’s stock in the autumn of 2000, after a deal with Novartis.

Trading rumors fly all the time, and one influential analyst at a big-name investment bank might downgrade a drug company’s stock, causing a selloff. In the early 2000’s, there was an SEC accusation of insider trading against Vertex’s house counsel. Ironically, it is common practice for panel members of the FDA to receive financial support in research-funding from many pharmaceutical companies.

Those companies that are public must answer to Wall Street. Unsurprisingly, at numerous medical conferences, their executives spout cliches such as “…We believe it’s a matter of time before we break this disease wide open and make a really big difference for a lot of people.”

Read the book to learn about actions Vertex took in research, development and finance in order to stay in business twenty years while accumulating losses of more than $1.5 billion; the causes of its high turnover of executives; how it became more geared toward finding commercial applications with its research results, and how it had fared product-wise and financially by autumn 2013.

Bonus Post

This blogger skimmed the ebook, “Adventures of a Currency Trader” by Rob Booker, published in 2007.

This fable describes fictional characters who were doing currency trading in the early 2000’s at New York City offices. It is about human nature. People are loss-averse and lazy, but love gambling.

It is difficult to say whether readers will actually heed the lessons in the story because it has many unrealistic elements; among them: a) the newbie-trader protagonist had a major mentor who cared about him even though he impulsively disobeyed his mentor from the get-go; b) the protagonist influenced an entire trading floor of seasoned traders; c) the protagonist had access to all the resources that significantly accelerated his learning curve.

The moral is that those who realize they are passionate about currency trading– before they actually start trading with highly leveraged real money– need to understand what they are getting into and do their homework– develop on paper, a trading system that is statistically profitable in the long run.

Read the book to get an overview of currency trading, including the risks, and the mentalities of different traders.

The Real Deal

The Book of the Week is “The Real Deal, My Life in Business and Philanthropy” by Sanford Weill and Judah S. Kraushaar, published in 2006. This career memoir describes how, over the course of about fifty years, Weill became a major change agent in the American financial services industry. His specialty became leading the execution of mergers and acquisitions for the investment, banking, and insurance companies of which he was an executive and board member.

In spring 1960, he started a securities brokerage, actually on Wall Street, with three partners. The stock market was bearish in 1962 and 1963. Interesting Side Note: “The typical stock in the Dow Index had a price 23 times its earnings as this downturn began, compared to a multiple of only 10 times in the early 1950s.”

Through the years, he gained more and more power and accumulated more and more wealth. When he attended events at which he had to speak to stockbrokers, he adopted a policy of brevity, saying, “You’ve heard enough speeches– what questions do you have for me?”

Although the author fostered a corporate culture of informality and “Management By Wandering Around” at his own company, in many instances, he failed to take into consideration the culture of the target company. His strengths lay more in bringing the top executives of the parties together to do the deals, and negotiating the new management structures. It was ironic that he was such a poor judge of how the two cultures would mesh once the integration process began.

At times, Weill tapped the power of his friends in high places, one of which was the government. It helped him change federal law to allow transactions to proceed. For instance, prior to 1999, certain banking and investment banking services could not be legally offered by the same company, due to financial conflicts and possibilities for abuses. He and his cohorts had a hand in making the historic change so that people within the same company could offer their clients all kinds of financial services.

Weill describes a whole bunch of instances that provided evidence for the necessity of strict financial auditing laws. In just a few years at the turn of the 21st Century, greed had spun out of control in the industry, leading to the accounting scandals of Enron and WorldCom, the dot-com crash, and a major hedge-fund crash that required a bailout. A terrorist attack didn’t help, either. By 2002, the chickens had come home to roost in the form of a bear market. “The regulators, the press, and politicians of all stripes…” played “the game of pointing fingers.”

And yet Weill writes, “…governance rules mandated by Sarbanes-Oxley (enacted in summer 2002) made it seem likely that bureaucratic needs would trump the fun of the business.” He also complains that businesses would have to spend more money preparing their financial statements. Sorry about that, Mr. Weill. Yes, pesky, bureaucratic, expensive laws reining in greed are no fun.

Six years later– same song, different verse… a whole lot worse. Need it be said– The more things change, the more they stay the same. History will continue to repeat itself, given human nature.

Read the book to learn the details of Weill’s career ups and downs and trials and tribulations. This blogger skipped the last chapter, in which Weill merely rambles on stating his opinions, and the endnote, which is an interview with his wife, whom he lavishly praises as loving and supportive throughout this ebook.

Why I Left Goldman Sachs

The Book of the Week is “Why I Left Goldman Sachs” by Greg Smith, published in 2012.

This career memoir details how the author experienced the change for the worse in corporate culture of stock brokerage Goldman Sachs (GS) over the course of a little more than a decade, from 2000 to early 2012. The company lost its way in terms of its mission and values, which embodied fiduciary duty and integrity.

In 2000, the author completed the selective, elitist, highly coveted summer internship program at the brokerage. He saw how principled the money managers were in recommending truly suitable transactions to their clients; not necessarily the most profitable ones.

When he began working there as a full-fledged staff member the following year, he took to the work, possessing the right combination of talents, skills and abilities to focus for long hours on conferring with clients and doing what was financially best for them. The goal was to build trust in order to foster a long-term relationship. It stands to reason that that is a more profitable course of action than seeking to rake in maximum money in the short term– which would provoke disloyalty from the client, when the client realizes he’s been taken advantage of.

Smith writes that a gradual change was occurring at his workplace around the start of 2005. At the time, he admittedly was “drinking the Kool Aid” like everyone else. The megabucks were multiplying because conflicts of interest were increasing betwen the brokerage and the government and other entities with which the brokerage was associated in various ways. The CEO and COO of GS were all for it. Their yearly letter to shareholders reasoned that such conflicts were inevitable, and were a sign that business was good. A telling example: GS netted approximately $100 million when it helped its client, the New York Stock Exchange merge with publicly traded, electronic exchange Archipelago in a $9 billion deal.

In the early 2000’s, one trend in the securities industry that would contribute to huge financial losses for the big firms including GS, was automated trading via software. The autotraders of the different firms were programmed to engage in largely the same behavior. They sought to trade in obscure, off-the-beaten path investments in markets in which it was difficult to find a buyer when it came time to sell. And they were all trying to sell at the same time. That was not a condition the autotrader creators had anticipated.

Another aspect of the big picture was that the people selling the financial products– more specifically, derivatives– did not themselves, understand what they were selling. It might be recalled that a derivatives debacle plagued the securities industry in 1994. Apparently, in 2007-2009, the greedy people involved in this rerun of a financial catastrophe failed to read their history, or had short memories. And governments of entire countries like Libya, were suffering losses of billions of dollars, thanks to GS, in 2007.

Read the book to learn much more about the outrageous occurrences borne of avarice witnessed by the author and the world during what became for him, an ordeal, characterized by the saying, “The fish rots from the head down.”

Diary of a Hedge Fund Manager

The Book of the Week is “Diary of a Hedge Fund Manager” by Keith McCullough and Rich Blake, published in 2010. This sloppily proofread ebook is about McCullough’s passion for ice hockey, and personal experience on Wall Street in the the single-digit 2000’s.

McCullough grew up playing hockey in the Thunder Bay area of Canada. He had a dream of playing professionally, but built a career in the stock market in the United States instead.

At the turn of the 21st century, Ivy-League college connections allowed McCullough to get a job with money managers. He spent a short time at a few places, having been lured to the next place by more money. The companies were able to run legalized Ponzi schemes because they had “… access to institutional channels, corporate and state pension funds, nonprofit foundations, and university endowments, not to mention the world’s wealthiest individuals…”

Most of the hedge funds of that period engaged in poisonous groupthink– cartelizing behavior (but apparently were never taken to task by the government for price-fixing/monopolistic practices)– they all bought the same stocks to overhype them and push up their prices artificially. They “… had devolved into nothing more than highly touted engines for producing excessive compensation.”

Read the book to learn:

  • the steps McCullough took to co-found a hedge fund and how he and it fared;
  • what else he has been doing;
  • how he defines a trade, a trend and a tail; and
  • the method he uses and philosophy he espouses to sense what is going to happen in the market.

Here are two hints: He thinks closing share prices and integrity are very important.

Bonus Post

With the U.S. midterm elections approaching, this blogger paged through Al Franken’s book, “The Truth with jokes” (but it isn’t funny), published in 2005. It is mostly about:  election, military and economic issues in connection with George W. Bush’s first term.

One controversial issue (still a relevant question years later) that Franken covers is that “…seven months into the [Iraq] war, Donald Rumsfeld wrote a memo asking whether we were creating more terrorists than we were eliminating. ‘We lack the metrics to know,’ he lamented at the time.” A few years later, the government admitted it had the metrics– statistics on terrorist attacks– and the answer was yes.

In 2000-2001, when Bush was first “elected,” Federal Reserve Chair Alan Greenspan was excited that “After eight years of Clinton-style fiscal discipline and economic growth, the era of big deficits was over, and we were running surpluses…” As is known now, Greenspan’s assessment of America’s financial shape turned out to be a bit off the mark. By 2005, the U.S. government had to borrow $2 trillion.

Therefore, the Bush administration might have been wrong in predicting that Social Security would run out of money by 2042. There were then murmurs about privatizing it. Al Franken and his political ilk squelched Bush’s attempt.

Nevertheless, Franken has done extensive economics research, as is shown in this video:

This blogger thinks it is well worth watching in its entirety.

Bonus Post

This blogger skimmed the book, “So Far, So Good– The First 94 Years” by Roy Neuberger, published in 1997. This is Neuberger’s autobiography. He was born in July 1903. His father was 52 at the time. He was nine when his mother died and thirteen when his father died. His sister Ruth was twelve years older than he was.

In the winter, he would ice skate on the flooded tennis courts of Columbia University in Manhattan. Neuberger inherited lots of money from his father, who had been a successful businessman. He dropped out of New York University after a year because he felt he wasn’t learning enough to justify staying to join the tennis team when permitted to– in sophomore year.

In October 1929, Neuberger worked to record stock transactions via pencil and paper for a clearinghouse. The market at that time was open for two hours on Saturday. The borrowing power allowed for a margin account in the late 1920’s was 1000% but at the time of release of Neuberger’s book, it was only 100%.

Neuberger & Berman– the investment-managing business started by the author in December 1940– bought a computer in 1967, costing $1.5 million. It needed sixty people to run it, but was worth the cost because in 1970, “… five of the ten largest Wall Street brokerage firms failed, in part because they couldn’t keep up with the volume of trading.” And the market closed at 3pm in those days.

Read the book to learn of how Neuberger, along with his contemporaries amassed tremendous wealth and privilege, and a giant collection of fine art.

The Billionaire’s Apprentice

The Book of the Week is “The Billionaire’s Apprentice” by Anita Raghavan, published in 2013. This ebook describes the investigation into the activities of a few Wall Streeters who were accused of insider trading in the past several years. Most of the accused happened to be of South Asian descent–from  Sri Lanka and India.

One concept the book conveys to readers is that it is unknown how many American securities-industry professionals are benefiting from insider trading, but the people in this book just happened to get caught because there was sufficient evidence against them to prompt the SEC, US Attorney’s office and FBI to go after them, rather than other possible offenders. The departments involved included the SEC’s Market Abuse Unit and the Department of Justice’s Securities and Commodities Fraud Task Force in the legal jurisdiction of the Southern District of New York (covering Manhattan and the Bronx, according to the author).

Another concept is that the investigating organizations and the securities industry are staffed with many people who, during their careers, switch allegiances. They might go from being a prosecutor to being a defense attorney, or from brokerage executive to government regulator, or vice versa. In this book the “old boy network” is alive and well. Arguably, conflicts abound.

Read the book to learn, among other extremes, about wiretapping (not the NSA’s), about one of the accused who “had several phones– at least thirteen– and he used them all” and a $30 million legal bill.