Hey, Hedge--Fund Fans, Here's Quite A Deal
EDITORIALS
By BENJAMIN J. STEIN and PHIL DEMUTH
This will reply to your expression of interest in becoming
a limited partner in The Friends in High Places Fund,
hereinafter called "The Fund," an aggressive investment
vehicle that seeks to exploit differences in the prices of
similar but differently priced assets and liabilities, and to
trade large amounts of them to distribute risk and to
make profits beyond avarice.
Although to invest in The Fund you must meet certain
strict guidelines, which will be spelled out in a
mind-numbingly long and densely phrased document
available from our lawyers, the basic requirements are
these:
* A net worth of $20 million exclusive of first home,
second home and polo ponies.
* A present or former executive management post
with the Federal Reserve, the Treasury
Department, the International Monetary Fund
and/or the World Bank, or a similar connection
with similar institutions in Japan, China or any of
the major industrialized nations.
* Connections to an official with decision-making
power at any financial institution capable of
lending $300 million or more within 48 hours of
the request, on questionable (or, preferably, no)
collateral.
* A Nobel prize, Seidman prize or Walker prize in
economics.
* A wife or girlfriend of less than two years, at least
20 years younger, in excellent physical condition
and with a taste for fabric wall coverings.
The Fund will operate from a proprietary
computer-driven arbitrage trading model developed by
mathematicians and physicists from the atomic weapons
program of the former Soviet Union, using a computer of
the same power (the "People's Vengeance on Capitalist
Hyenas 6600Z") as was used to simulate the effects of
the explosion of a 60-megaton device over lower
Manhattan.
Our strategy: The Fund will, for example (and not to be
divulged publicly), trade, buy or sell very large quantities
of Uzbekistan state bonds, while at the same time buying
or selling municipal improvement bonds or notes of
Ouagadougou, capital of Burkina Faso. Or, to use an
example closer to home, we will buy or sell large
quantities of antique Coca-Cola trays while
simultaneously buying or selling similar amounts of classic
1966 red Ford Mustangs.
All of The Fund's trades will be fully hedged, using a
method devised by rocket scientists in the former Soviet
Union who developed the still-formidable SS-29 (a/k/a
"Workers' Honest Vengeance on Wall Street
Bloodsuckers, Parasites and Running Dogs") ICBM
with multiple independently targeted warheads. This
method of hedging, known as the "Tovarishchi Droogi,"
involves the purchase or sale of an entity and the
simultaneous cutting in of a high government official or
close friend of a high government official in the trade's
profit at no cost to the official or friend. Other funds
have sought to utilize this method by employing and
involving highly placed personages in their funds'
operations. But we believe that The Fund has carried
this concept to a previously unheard-of level.
We will have on our board of advisers ("The Board")
not only Nobel prize winners in economics, but also
Nobel Peace Prize winners, the children of the
Lubavitcher Rebbe ("The Rebbe"), close colleagues of
The Holy Father ("The Father"), persons from The Holy
See ("The See"), and at least two members each of the
Supreme Court ("The Court") and the Securities and
Exchange Commission ("The Commission").
While past performance doesn't guarantee future results,
The Fund believes, based upon our trading history while
the fund was run privately by its two founders, Phil
DeMuth and Ben Stein ("DeMuth" and "Stein"), that with
a reasonable degree of risk, The Fund can deliver
returns of not less than half of those obtained by
investing in a no-load, no-fee S&P 500 Index fund.
The Fund cautions, however, that, in some years, all of
the invested principal of the partners can be wiped out
by occurrences not known at present. However, the
notional value of the invested funds is hedged by The
Fund's unique Dinner Table Guarantee ("The
Guarantee"). The Guarantee states that even if all of the
investor's contributions are wiped out, the fellow
investors in the Fund (also wiped out) will be such
famous and interesting personages ("The Personages")
that the investor will be able to dine out on stories of his
losses with them forever.
Investments in The Fund are in units of not less than
$1,000 with a minimum investment of 10,000 units.
Please call us to arrange for lunch at your club to discuss
this investment. We expect it to be sold out within two
weeks.
Sincerely,
Benjamin J. Stein and Phil DeMuth
PHIL DeMUTH is a screenwriter and former diet
doctor in Santa Barbara, California. BENJAMIN J.
STEIN is the host of Win Ben Stein's Money on
Comedy Central, which in no way reflects on the
seriousness of The Fund.
An Update to Our On-Going Analysis of IBM Insiders' Trading
Where Armonk Meets Wall Street,
Greed Breeds Incest
About $185M-worth of Stock Sold by 16 Insiders for $116M Pretax Gain in
Last Two Years, While Their Company Was Buying Back Shares
PHOENIX - "I keep reading in the papers about the stock setting records all the time, but how come I am
not getting any more money?" a "golden age" IBM shareholder voiced her concern recently. "In the old
days, I used to get more coupons to clip, as the companies that did well increased their dividends."
Well, those were the good old days; the days of the "buy and hold" shareholders. Today, it's "buy and
sell" investors that are making money, often by selling the stock back to the company. Which includes
insiders. As for the small general shareholders, like the above retired lady, well they can read in the
papers about how well their company is doing. Or join the crowd and sell, while the selling is still good.
If the latter day Armonk connotes "Greed Inc." (and most indicators point that way), then the latter day
Wall Street stands for "Incest Inc." (as most signals also suggest). And where Armonk meets Wall Street,
greed evidently breeds incest. While the Big Blue was buying back its stock by the tens of billions of
dollars, IBM insiders were selling their shares by the tens of millions of dollars. Talk about self-dealing.
And NOT putting their money where their mouths were.
Since September 1996, roughly the time the Era of Greed was ushered into Armonk, the insiders have
sold about $185 million of their IBM shares for about a $116 million pretax gain. Yet the Big Blue's stock
surged to another record ($170) today (Friday, Nov. 27), up from about a $60-level in September 1996.
How's that possible? Have the investors gone mad? Insiders selling; the stock surging? Well, maybe not
mad; but certainly duped by both Wall Street and IBM.
The scam went like this. The Big Blue has taken over $23 billion out of its business and put it mostly in
the Wall Street institutions' pockets (through stock buybacks). The grateful Street, in turn, kept issuing
glowing research reports about IBM, helping create an illusion of prosperity despite its mediocre business
results. In turn, this attracted the gullible suckers to buy the Big Blue stock, while the insiders cashed in
on their own hype.
Who says America's "Robber Baron" days are over? It's just that they have merely mutated to a more
perfidious strain. At least the America's 19th century "Robber Barons" created jobs and products. From
1865 to 1913, the U.S. economy grew at 4% per year, overtaking most of the industrialized countries.
Yet here is IBM, along with a number of other Fortune 500 companies, turning over to Wall Street more
than $600 billion in the 1990s without creating a single new job or a product.
And all this is happening in full view of the Securities and Exchange Commission (SEC) whose
commission is to protect the American consumers from fraudulent stockmarket activities. The fact that
there has not been a peep about it from the SEC or Congress (despite our correspondence with both, and
some "warm fuzzies" which this writer has received from various Senators), suggests that they may be in
on the scam. The lowering of the capital gains tax in 1997, which provided the first "legitimate" incentive
for stock buybacks, also hinted in the same direction.
"A Little Inconsistent"
The Journal which keeps a close watch on goings on in the street called Wall from which it borrows its
name, also reported on Nov. 11, that IBM earnings may be at their peak now that the Armonk insiders
were selling.
"The timing of this round of selling is a little inconsistent with the Street's almost wild optimism for the
(IBM) stock right now," said Craig Columbus, vice president of research at Disclosure Inc., which tracks
the insider trades for institutional investors.
"A little inconsistent?" The Main Streeters might have chosen the terms like a "scam;" a "financial
perversion;" or at the very gentlest - a "dichotomy."
Speaking of dichotomies, also worthy of note is the fact that only three IBM insiders bought the
company's stock on the open market since October 1997. And at that, it was a miniscule amount (1,900
shares). On the other hand, the insiders sold over 850,000 IBM shares worth about $108 million during
the same period - for about a $76 million pretax gain. Which means that about two-thirds of all IBM
insider trading gains in the last two years were realized in the first 10 months of the 1998 "bull market."
Greed Starts at the Top
"Fish always stinks from the head," says an old Eastern European proverb. Given its apparent loss of
sensory perception, except for the smell of money, Wall Street keeps mistaking a stench for a perfume
nowadays. Kind of the way the 18th century French aristocrats treated the BO. They perfumed and
powdered themselves rather than take a shower. And their courtiers took the hint and did likewise.
The same is true at Armonk today. To find out where the stench of greed is the strongest from, follow
your nose to the corner offices. Our analysis of IBM insider trading, based on the latest Vickers' report
and SEC filings, reaffirms that Armonk '98 and Greed Inc. are virtually synonimous (for our earlier
analyses - see Annex Bulletins 98-16, 4/07/98; 97-31, 7/24/97 and 97-22, 5/27/97).
Lou Gerstner, the CEO, cashed in to the tune of about $31 million in pretax gains in the last six months.
Since the Big Blue insider trading spree started over two years ago, Gerstner has disposed of almost $47
million of IBM stock, for a pretax gain of nearly $38 million (he sold no shares on the open market in
1996 and 1997, but had exercised stock options for gains of $3.5 million and $6.7 million respectively).
One should bear in mind that this IBM chairman's insider trading gains were over and above his salary
and bonus, which in 1997 amounted to $6 million.
Other IBM Insider Medallists
It didn't take long for other insiders to get a clue from the IBM chief that the era of Greed had arrived at
Armonk. Some had even preceded Gerstner in insider selling. Kind of testing the waters for the boss?
Like the "silver medallist" among the 16 IBM insiders who sold the stock, the IBM "software czar," John
Thompson. He raked in about $13 million in pretax gains during the last two years on over $26 million of
stock option or open market sales. Most of Thompson's gains occurred in 1996 and 1997, when he
profited from insider trades to the tune of $6.1 and $6.6 million respectively, according to the IBM Proxy
Statement. But he hasn't done too badly in 1998, either. We estimate that Thompson has realized a
pretax gain of about $2.8 million by the end of October.
Perhaps a surprising "bronze medal" winner in Armonk's two-year insider selling spree was Nick
Donofrio, IBM's senior vice president and chief technology officer, who benefited to the tune of over $10
million from his insider trades in the last two years. We say "surprising" because IBM's Mid-Hudson
Valley engineers are better known for their "salt of the earth" Main Street pride than for their greed.
Guess there are exceptions to any rule, especially in a world ruled by greed.
Here's what Donofrio told us in May 1997, for example, when we first started investigating IBM's insider
trading activities (see Annex Bulletin 97-22, 5/27/97):
"When asked why he chose to exercise his stock options in 1996, Donofrio said that, 'the rules have
changed. IBM’s interpretation has also probably changed. I mean the stocks are worth something'.
Donofrio added that he was 'complying with all of IBM’s rules and regulations that tell me when I can
and when I can’t buy and sell stock and the SEC's (rules)'."
Spoken like a true lawyer or a Wall Street broker, but hardly as an IBM Watson-era engineer.
"Asked in what respect did the IBM rules change, Donofrio replied: 'I am not an expert here. But we
were very rigorous about things like that in the past, suggesting very narrow windows as to when we
(the insiders) could sell or buy' (the stock)."
Indeed, a former IBM executive said that in the old days (i.e., the pre-Gerstner era), the insiders were
discouraged from 'selling the stock at all' without clearly identifiable personal reasons. 'So that even
any hint of insider selling was frowned upon,' this executive added'."
Evidently no longer. Nor was Donofrio the only one among the pre-Gerstner era IBMers who took
advantage of the "new rules." According to IBM's 1996 and 1997 Proxy Statements, Ned Lautenbach
and Bob Stephenson, for example, each realized $10.4 million and $8.4 million gains respectively from
their insiders trades during those two years.
To find out who the rest of the 16 IBM insiders were, and by how much they profited from insider stock
trading, please refer to the charts on pages 3 and 4 of our print Bulletin.
SUMMARY
Tom Watson Sr., the legendary IBM leader in its first 40 years, one of America's famed "Robber
Barons," is probably turning in his grave right about now. For, if a business leader bent a rule or two
back in his days, he did it while hustling for the good of the company. Which included the small
shareholders, like the one from our opening paragraph.
Nowadays, the message from where Armonk meets Wall Street is that greed breeds incest; that the "rules
have changed;" that now it's each man for himself.
As for the "buy and hold" little old lady-shareholders... well, they can always buy a newspaper and read
to their bankers about how great things are at Armonk.
Happy bargain hunting!
Bob Djurdjevic
Bob Djurdjevic
ANNEX RESEARCH
Phoenix, Arizona
e-mail: bobdj@djurdjevic.com
We invite you to visit the Web site: http://www.djurdjevic.com
Published on November 19, 1998
Cash bankers' biggest worry
They worry that concerns over the Year 2000 will cause many customers to withdraw too much money
What's going on. The banking industry is at the forefront of business efforts to remedy the Y2K problem, but its
progress hasn't been enough to convince skeptics who are advising people to withdraw plenty of extra cash before
January 2000.
The pitfalls. If too many people start withdrawing too much cash at one time, banks could run out of their finite supply
of cash, triggering a panic that would turn the worst fears about the Y2K computer bug into a self-fulfilling prophecy.
Even if all their systems are "Y2K compliant," bankers also could run into trouble in 2000 if the phone lines that transmit
electronic transactions fail or if their software vendors haven't cured their own Y2K ailments.
What you can do. Bankers believe customers can best protect their assets by making sure that they keep all their 1999
account statements. "There is a paper trail to follow (if something goes wrong). It's not like your account is going to
become an electronic cipher," says John Stafford of the California Bankers Association. Stafford, like many other
industry observers, also thinks it's wise to have a little extra cash during the first few days of 2000.
By Michael Liedtke
TIMES STAFF WRITER
Most bankers aren't too worried about a Year 2000 computer meltdown because the industry has done more work
debugging the potential problems than any other sector of the economy.
It's thinking about the days leading up to Jan. 1, 2000, that keeps bankers awake at night.
Bankers realize most customers are going to withdraw more money than usual before 2000 to guard against possible
computer crashes that shut down electronic commerce. They just don't know when the dash for cash will begin or how
intense the demand will be.
And that uncertainty is enough to conjure images of a banker's nightmare -- long lines of impatient customers forming in
front of automated teller machines and branches demanding to withdraw more money than is in the vault.
If this were to happen, it could trigger old-fashioned bank runs and short-circuit all the banking industry's expensive,
tedious work to fix the Y2K problem -- a term that refers to the inability of certain computer systems to recognize the
year 2000.
If computers don't recognize the new millennium, the affected systems may just shut down, restricting access to
everything from the food supply to the money supply.
Facing rigorous oversight from government regulators, most bankers seem confident that the industry will be "Y2K
compliant" and able to conduct business as usual in 2000.
"We don't think there will be any need to stockpile more than just a few days of cash just in case of some unforeseen
disruptions," said John Stafford, a spokesman for the California Bankers Association, the state's biggest trade group.
Industry insiders predict that banks that don't meet the federal regulators' standards for Y2K fitness by mid-1999 will
be forced into the equivalent of shotgun marriages -- mergers with competitors whose systems are in shape.
The industry's optimism is countered by plenty of skeptics who contend that it's humanly impossible for bankers to fix all
the computer code that could go awry beginning in 2000. The challenge facing banks is daunting; the Bank of America,
for instance, is poring over 200 million lines of code in 300 software programs at an estimated cost of $380 million.
Bankers fear these nagging doubts about the industry's ability to assure the safety of customer funds will persuade even
the most level-headed of people to overreact and withdraw more money than they probably are going to need.
"If you go into a room and ask how many people think the Y2K problem is basically going to be a nonevent, almost
everyone raises their hand," said James Ryan, chief executive officer for the Bank of Walnut Creek. "But then if you ask
the same people in the same room, how many people are going to make sure to have an extra $500 in cash on hand in
2000, almost everyone will raise their hand again."
Ryan's observation isn't just anecdotal.
Most of the respondents in a poll conducted by ZDNet News/Harris said they intended to withdraw more than $1,000
in cash before 2000. In the same poll, 56 percent of the people said they planned to take out at least 40 percent of their
money held in bank accounts.
Experts who have studied the possible ramifications of the Y2K problem are advising people to have a cash cache in
January 2000. The GartnerGroup doesn't expect Y2K computer glitches to cause a societal breakdown, yet the
Stamford, Conn., consulting group is recommending that households withdraw the cash equivalent of two weeks'
income to cope with possible emergencies.
If everyone heeds that kind of advice, it will put a severe strain on a banking system that simply doesn't have enough
money in its vaults to liquidate every deposit account.
Adding up all the U.S. money actually in circulation or held in bank vaults illustrates just how much of our currency really
is just an entry in an electronic ledger and explains why many people are worried about the Y2K problem causing a
financial panic.
Customer deposits in bank checking and saving accounts total $3.7 trillion. The Federal Reserve Bank estimates that
there is about $488 billion in U.S. dollars circulating around the world and just one-third of that total -- about $118
billion -- is in this country. Individual banks hold about $43 billion in reserve. The Federal Reserve just a few months
ago announced plans to print up to an additional $50 billion in currency to add to its normal reserve of $150 billion to
$200 billion to help meet the anticipated rush for cash before 2000.
Add it all up and, depending on how you do the math, there is probably just enough cash for an average of $2,500 to
$3,000 per U.S. household.
That sounds like it should be enough to tide people over while technicians try to repair any Y2K breakdowns that occur
in early 2000, except there are no withdrawal limits to prevent some people from hoarding huge sums of cash.
And people who believe the Y2K problem will culminate in a full-blown crisis are already building their own cash
reserves. These Y2K pessimists liken their actions to someone who elbows to the front of a line to receive a shot from a
limited amount of vaccine to guard against an oncoming plague.
Bankers are trying their best to discourage this kind of thinking, but it's not going to be an easy task. Even if government
regulators conclude a bank's computer system is ready to meet the challenges of Y2K, bankers won't be allowed to
pass on this reassuring information to their customers.
"The whole thing is going to come down to perceptions," Ryan said. "If people perceive that their bank's leadership has
done a good job preparing (for Y2K problems), it's not going to be a big deal. If people start feeling afraid, then it's
going to be a real big deal."
