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Thursday, February 5, 2009

The Double Standard of Fraud

Jonathan Hoenig, whom I admire and believe has a solid business head on his shoulders, sends me an email every so often. Each time I read the message I think, wow, this guy is right on!

He usually publishes his email blasts in Smart Money

I'll share his latest post about fraud...

The Double Standard of Fraud
By Jonathan Hoenig - February 5, 2009

Between endless television coverage and heated congressional hearings, the Bernie Madoff scandal has received a great deal of attention lately. Yet another fraud, one even more brazen and nefarious, has received scant notice.

Marc Dreier is a Yale- and Harvard-educated lawyer who founded a multistate law firm that at one point employed more than 250 lawyers.

While leaving a meeting in the Toronto offices of the Ontario Teachers’ Pension Fund last December, he intercepted a representative from a New York investment company and, misrepresenting himself as an official from the fund, allegedly attempted to sell fake promissory notes.

The suspicious investor ended up calling authorities, who arrested Dreier later that night. The con now uncovered, Dreier has since been charged with multiple frauds that have cost investors more than $400 million dollars…all committed while he was a popular and highly regarded lawyer.

Yet even though Dreier used his legal credentials to commit a massive crime, there have been no calls for increases regulation of the legal profession, as there has been with hedge funds following the Madoff affair.

Why the double standard? We give lawyers the benefit of the doubt because they’re supposedly tireless advocates working for the best interest of their clients.

Hedge funds on the other hand, are profit -seeking entities looking to make money. For some reason, that self-interest casts a much more suspicious shadow.

Yet even though the Dreier case -- or the Daschle/Geithner tax dodges -- demonstrate that illegality can occur anywhere, the investment community will bear the brunt of the cost of even more onerous regulation and oversight.

The big winners are the “self-sacrificing” lawyers, already tallying their billable hours and soon laughing all the way to the bank.

Amtrak’s Free Ride
Advertisers nationwide are cutting back, but not Amtrak. The government-owned railroad has just launched a TV and print campaign promoting its new Acela Express service. Pricey pages in The Wall Street Journal and New York Times along with local TV are among the media exposure the company will be purchasing this spring.

Of course, it’s easy to spend money when you’ve got a sugar daddy in Washington. Amtrak is on track to receive up to $1 billion from the “stimulus” bill. It has received over $40 billion of taxpayer dollars over the past four decades and, unlike Citigroup (C: 3.58*, +0.09, +2.57%) or Bank of America (BAC: 4.63*, -0.07, -1.48%), has never made a profit in its history.

Amtrak has been a financial disaster since inception, perfectly demonstrating why government ownership of the private economy is an economic death wish. Yet as we’ve been pointing out for almost an entire year now, that’s exactly the direction in which Washington is moving.

Running the banks or the health-care system in the same semi-socialist fashion as Amtrak has been will garner the same results: losses, stagnation and waste.

Buffett’s Contrarian Bet
Warren Buffett's track record is slightly tarnished as of late, as the Oracle of Omaha has taken lumps on investments in Goldman Sachs (
GS: 91.99*, +4.02, +4.56%) and General Electric (GE: 11.08*, -0.18, -1.59%), among others.

Yet these setbacks don’t seem to bother the world’s richest investor, who emphasized in a recent New York Times op-ed, his belief that investors should “Be fearful when others are greedy, and be greedy when others are fearful.” Just today he announced another deal to inject more capital into Swiss Re (SWCEY).

No question that fear is now firmly in command.

Although consumer confidence data released this week ticked slightly higher, it remains just a hair off its all-time low reached the last week in January. With unemployment and socialism rising fast, Americans aren’t merely downtrodden…they’re downright depressed.

(There's a graph here depicting the relationship between Consumer Confidence and The S&P 500. It wouldn't reproduce accurately. Go to Smart Money's site to see it.)

Plotting the consumer confidence data against the S&P 500 reveals a fairly obvious trend: that confidence, especially since the modern investor class emerged in the mid-1990s, tends to follow the stock market quite closely, albeit with a slight lag. With virtually no leading sectors, unprecedented government intervention and a nearly $1 trillion pork-laden stimulus bill likely to pass, investors have good reason not to be optimistic. Yet if Buffett’s adage holds up, the collapse in confidence to record lows could be offering up the stock market sale of the century.

As always, only time will tell.

When Minneapolis Lost Its Voice
Among the regional stock and future markets, none was more beautiful than the Minneapolis Grain Exchange, with a stunning trading floor featuring 32-foot ceilings and hand-painted frescoes depicting the various uses of wheat. After 127 years, the exchange closed its floor last year, moving all contracts to its electronic platform. The YouTube video documents the historic trading floor’s final closing bell.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC

Thanks Jonathan for your always insightful perspective...

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