Madoff geeks charged for writing book-cooking code

House 17' and the secret algorithm

A federal grand jury has indicted two computer programmers on fraud and conspiracy charges for developing programs used by Bernard Madoff to cook the books in his billion-dollar ponzi scheme.

Jerome O'Hara and George Perez knowingly created the programs that removed or altered key data contained in reports submitted to regulators in the United States and Europe, according to the indictment filed Wednesday in US District Court in Manhattan. Among other things, their code contained algorithms to randomly generate times for purported orders that in fact were never made.

The reports were generated on "House 17," an IBM AS/400 server kept on the 17th floor of Madoff's offices that had no link to the outside world, prosecutors allege. To ensure the reports appeared genuine, the server pulled partial information from a separate AS/400 that was linked to the Depository Trust Company and other third parties.

"The books and records generated by the House 17 programs for [Madoff's] business were entirely false and fraudulent because, among other things, they purported to reflect securities transactions that, in fact, had never been executed," prosecutors allege in the indictment.

The document goes on to claim that the programmers knew their programs were being used to falsify information being provided to the Securities and Exchange Commission and the European Accounting Firm, and sought to profit from their expertise. In 2006, O'Hara and Perez cashed Madoff checks worth $976,000 and $289,000 respectively.

That same year, the pair threatened to leave their jobs unless they received raises of 20 percent. Madoff not only met their demands, he also gave them raises of $64,812 and $60,165.

They were charged with one count each of conspiracy, falsifying records of a broker-dealer and falsifying records of an investment adviser. If convicted on all counts, the programmers each face 30 years in federal prison and fines of more than $5m. O'Hara's attorney told numerous news outlets that his client intends to plead not guilty.

O'Hara, 47, and Perez, 44, who worked at Madoff's firm since the early 1990s, were first charged in November for their alleged role in the multibillion dollar fraud that spanned decades. Wednesday's charges came after the indictment was returned by a federal grand jury.

Investors sunk about $36bn into Madoff's ponzi scheme, according to CBS News. Of that, about $18bn was liquidated before the house of cards collapsed and the other half is missing. Madoff is currently serving a 150-year prison sentence. ®

By Dan Goodin in San Francisco • Get more from this author

Source:  http://newscri.be/link/1046611

12 Things You Must Know About Investing Right Now

Investor confidence is right back to where it was almost a year ago, when the markets were recovering from the worst bearish streak in recent memories.

Many investors are worried that the rally came too far, too fast. Those who sat out the rally think they might already be too late.

But this approach is wrong-headed. Both ideas assume that you should only invest if you can correctly time the market. If that were true, pretty much no one would ever be able to invest prudently. There’s a word for people who buy at the lows and sell at the highs: Liars.

If you are thinking about getting back into stocks, now might be the perfect time to avoid many of the errors that trap investors and eat away at any gains in their portfolios. In short, this time you have the opportunity to do it right. So here is our guide to investing wisely. Twelve tips that will help you avoid some of the most common mistakes.

Tip #1: Know Your Investing Costs

We’re going to start with the biggest error many investors make: they pay too much to invest. High costs of stock brokers, financial advisers, tax consultants and even mutual funds can completely destroy any gains in your investment portfolio. If you cannot figure out how to control your costs, you really might be better out not investing at all. The entire business of Wall Street often seems organized to hide the costs of investing from you. The fees are often written in small print on your quarterly statements, and you probably will have a hard time understanding them. No one will ever ask you to approve each fee after it is carefully explained to you. You don’t have to initial any boxes authorizing each fee you will be charged. So here’s how to address this problem: if you can’t figure out what fees you are being charged, you should not use that service to invest. Whether it is a brokerage account in which you buy and sell individual stocks or a mutual fund that does this for you, if the fees are not transparent and understandable, avoid it. Here are the four major sources of investing costs you should watch out for:

Brokerage Commissions. Every time you buy and sell a stock, your brokerage probably charges you a fee. Often these are flat fees, based on either the trade or the amount of stock purchased. Regardless of the way the fee is charged, the rule is the same: the lower the better.

Advisory Fees. Brokers and mutual funds will charge you a fractional amount based on the size of your portfolio. Often the number is small enough that you might not think it is a big deal to pay something as small as 2% but these costs add up quickly. In some flat years, that will eat away at all your market gains. In down years—and there are always down years—you’ll end up paying more than your earned. Together, the flat and down year fees can add up to more than the gains in a bull market.

Taxes. When your investment adviser tells you how much money you’ve made for the year by investing with him, he’s probably talking about pre-tax gains. But here’s the thing. You never get to pocket pre-tax gains. You pocket after-tax gains. That means you need to know how the tax system will treat the investments you make. And you need to anticipate what future developments in the tax code will be.

Inflation. This is the ultimate killer. If your investment gains don’t outpace inflation, you’re actually losing money in the long term as the value of your money gets eaten away.

Tip #2: Reduce Your Costs

Now that you know the costs that can tear into your portfolio, you need to find ways to reduce them. Here are five things you can do:

Invest in the lowest cost mutual and index funds available. This seems like a no-brainer. But many investors over look it. Tiny fractions of a percent can make a big difference over the years.

Pay Attention To Changing Costs. Just because you invested in a low cost fund to start, doesn’t mean the costs stay low. New products and competitors may have been introduced, and your fees may have increased. The price of Wall Street’s feedom is your undying vigilance.

Pay Capital Gains Not Income Taxes On Investments. An actively investing fund or a brokerage account with frequent sales generates a lot of high taxes on gains. You can reduce the cost of taxes by going with a passive fund that makes long-term investments. These pay lower capital gains taxes, instead of ordinary income taxes. But beware: there are some on Capitol Hill who would like to eliminate this benefit.

Invest Through A Retirement Account. If you are saving for retirement, make sure that you are using an account that has legal tax advantages that allows you avoid taxes now or in the future. This is a huge advantage. Most big employers will offer these accounts to you.

Buy Inflation Protected Treasuries. There are lots of opinions about how to reduce your exposure to inflation. Some people will tell you to buy gold, which tends to go up when the value of money goes down. This isn’t practical for most investors. A far easier way it to put part of your portfolio into TIPS—short for Treasury Inflation Protected Securities. This won’t protect you if the government of the United States collapses or repudiates its debt. But if that happens you’ll have a lot more to worry about than the effect of inflation on your portfolio.

Tip #3: Expose Yourself To Upside Surprises

One thing we’ve learned is that the markets are unpredictable. No one knew how bad things would get in 2008. And fewer people knew that the markets would boom in 2009.

Even studies that show gains in the broad market through history cannot tell us for certain what will happen in the future. In fact, there’s a lot of recent evidence that we’re underestimating the uncertainty of the future.

That’s a problem for investors because you cannot invest in the past. You can only invest now for gains you hope to make in the future. In short, you are always speculating on uncertain future events.

One way of handling the radical uncertainty of the future is to create upside exposure to really uncertain events. This means that you have to be willing to put some money down on one number on the roulette wheel. Don’t be a fool and make a huge bet and don’t do it completely randomly.

Here’s what you should do. Find an event that looks really unlikely in the future. Something everyone you ask tells you is almost certain not to happen. Make a small investment in that event happening. But be sure that the odds against you.

Let’s use an example. Buying a lottery ticket for a dollar isn’t a good way to exposing yourself to the upside of winning because the initial investment of a dollar is too much for almost any imagine jackpot. But if you could buy that lottery ticket for a few pennies, it would make sense. The point is that risky bets are fine if the cost of making them is low enough.

Tip #4: Limit Your Exposure To Downside Surprises

Just as you should put a small (tiny!) portion of your portfolio in very risky investments, you should also have a large portion in something very, very safe. Treasuries are the typical answer for this. This will protect you against the market doing something really unexpected.

The size of your safety net should depend on how old you are (if you’re younger, you have longer to recover from a big loss), how much you expect to need to withdraw from your portfolio in the next few years (you need more safe investments if you are saving for a house or your kids college), how psychologically well-prepared you are to handle losses in your portfolio (what investment advisers call “risk tolerance”) and how likely you think unlikely events will be.

Nassim Taleb, the author of the Black Swan, thinks unlikely events are far more likely than anyone expects. So he advises that you avoid “conservative” stock and bond investing altogether and put something like 95% of your money in Treasuries. That's pretty extreme. If you’re not as worried as Taleb, you might consider a smaller share.

Tip #5: Diversify

Everyone knows that they are supposed to diversify. But very few people understand how hard it is to really diversify. Here are some pointers on how to effectively diversify.

Asset Mix. You are not diversified if you own twenty stocks or even a hundred stocks but nothing else. You need a variety of assets classes—stocks, bonds, gold, Treasuries—to truly diversify.

Time preference. You portfolio should also contain assets that you expect will appreciate along different time lines. This is important, and widely overlooked. This will help you avoid having all your investments keyed to one time—a time when the market could be crashing.

Have More Than One Manager. The clients of Bernie Madoff believed they were diversified because they had so many different kinds of assets listed on their monthly statements. But many of them were exposed to a different kind of risk—the risk of getting ripped off by their asset manager. It’s not just outright thievery you need to worry about—investment managers can fail and take your portfolio with them. In short, diversification needs to happen at every level.

Tip #6: Beware Of Your Own Riskiness

Here’s another lesson made clear from the recent financial catastrophe. The sources of risk to your portfolio are not just what the market does, but how the market reacts to you.

Let’s take AIG as an example. It had insured billions of dollars of subprime mortgages, and it thought it would be safe because most of those would still be in the money even if the housing market tanked. So far, that’s still true. But what killed AIG was that as both the risk on those mortgages increased and the perception of the riskiness of AIG itself grew, it’s customers had the right to demand more money as collateral for the insurance policies they bought. AIG couldn’t afford to put up the collateral, which is why it went hat in hand to Uncle Sam.

AIG never considered the risk that its customers would demand more collateral. You shouldn’t be that dumb. While you aren’t selling derivatives, there are lots of ways you could find yourself squeezed into having to sell assets at the very worst time. If you don’t have enough cash on hand, you might find yourself having to sell stocks during a bear market to pay for your mortgage. If you bought in a margin account, you might get squeezed by your broker.

Overall, remember that you are exposed not just to your investments going up and down, but to other demands on your assets that could force you to sell investments when you don’t want to.

Tip #7: Engage In Insider Trading (Legally).

If you have a very important piece of information about the market or a company that no one else has, you should consider trading on that information. There’s nothing illegal about trading on secret information that you discovered through your own hard work or just dumb luck. In fact, this is one of the only ways anyone can ever beat the market.

Here’s the catch: Don’t do this if the information is about a company you work for or your spouse works for. And don't even do this if you have an obligation to another third party, like if you work for a financial publication that's about to write a favorable article about a company. If you got the information from someone related to you or who expects to gain from your trading, be aware that that also could violate SEC rules governing trading on non-public information. If you are uncertain, talk to a lawyer (who will probably tell you not to do it) or just don’t trade.

But don’t fall prey to the common misconception that you cannot trade on non-public information. You can and you should. Having knowledge that others lack is a very, very good investment strategy.

Tip #8. Don’t Buy The “Hot Stocks For 2009”

It seems almost unavoidable. Every year business magazines run features on the hot stocks or hot sectors for the coming year. You shouldn’t even read these.

The only thing these will do is distract you. By the time the story is in the magazine, the knowledge is already widely disseminated. Markets are efficient enough to price this in as well.

The same goes for investing on the advice of a guy like Jim Cramer. By the time the market opens the next day, a hot stock from Cramer is already priced too high.

If you must invest in “hot stocks,” here’s how to do it: wait a month or two. If the stock drops back down and you are persuaded it’s a good investment, go ahead. But the key is to avoid the initial rush of dumb and manipulative trading that goes on after the tip is first announced.
Tip #9: Read Your Quarterly Statement. Ignore Most Of It.

No one likes to read the statements from their financial statements when the market is down. They’re ugly. They make you feel stupid. They make you feel poor.

But you need to read your statements. Just not for the reasons most people think. You shouldn’t read them for the returns from the last quarter. That’s just noise that may make you panic and sell at the wrong time. You need to read them to keep track of the fees. Believe it or not, some funds and brokerages know that people don’t read statements during bear markets and they will raise fees during that time hoping investors won’t notice. So read the fees section and ignore the returns.

Tip #10: You Can Negotiate Anything.

If you are signing on to a big mutual fund, you will have to pay the fees they require. (Remember: most mutual funds are rip-offs, so only go with low fee funds.) But if you are opening a brokerage account, you will have room to negotiate your fees.

Financial advisers will tell you that the fees are fixed. They’ll say that they can’t change them. They’ll show you where this is all written down.

Don’t believe them.

There are many different fees brokerages offer, and they are not obligated to give you the cheapest one. The rules just say it must be appropriate to you. You should haggle with your broker to get the lowest fee you can.

When they give you a quote on the fees, start by telling them: "These aren't the fees I'm looking for."

Tip #11: Invest In Low Cost, Passively Managed Life Cycle Funds. Reinvest Your Dividends.



If all this seems like a lot of work—welcome to investing.

The single best thing you can do is probably invest in a low-cost, passively managed “life cycle” fund that adjusts your asset allocation as you age. This is really, really boring. But unless you are willing to do a lot of hard work, it is the absolute best thing you can do. Even if you are willing to do a lot of hard work, you should consider it. You might be over-estimating the value of your hard work.

If that’s too boring for you, find a brokerage that offers a low cost investment account offering a variety of services. Beware, however, that some of those with reputations for offering low cost accounts also offer high cost accounts. You need the lowest cost account at the low cost brokerage with a good reputation.

You should reinvest the dividend in your fund. Every year you should re-examine the fees and every five years ask them to help you analyze the asset allocation. If you get married, lose your job, buy a house, get divorced or have a child, you’ll want to re-examine the allocation.

Tip #12: You Can't Beat The Market And You Don't Want To

Now here are the three most important things you should know.

You can't beat the market. If you were hoping that you'd learn how to "beat the market" by reading this investment advice, you'll be sorely disappointed. Nothing here will help you beat the market. At best, if will help you not fall too behind the market. Very few people can actually beat the market--and most who do just got lucky.

You don't really want to beat the market anyway. The good news is that you don't have to beat the market. That's actually a pretty arbitrary measure. What you really want to do is save some of your money for later, and not let it lose value thanks to the passage of time and the cumulative effect of inflation. That's your real goal with investing. Not beating something or someone. Not getting rich quick. It's investing prudently for the future.

Returns Might Be Worse Than You Expect. In the past, diversified investing strategies have paid off moderately well even after taxes and inflation. But in the future this might not hold true. In fact, because of demographic changes, changes in the spread of information, changes in the age of the average investor, and a decade of stagnant or declining stock markets, we may be in for a long bear market. Spikes will reward the lucky market timers, and you may occasionally get lucky. But don’t count on stocks or bonds to go up along historical trend lines forever.

By John Carney - Prior to joining Clusterstock, John served as Editor-in-Chief of Dealbreaker.com a Wall Street online tabloid

Don't miss: Here Are The People Who Are Going To Get Nailed In The Lehman Examiner Fallout

Asiatic Greek tragedy with European characteristics

Bunn Nagara
The Star
Publication Date : 17-03-2010

The Greek financial crisis looks very much like getting worse, and not just for the Greeks. Nobody yet knows when or how things might get better for anyone.

Two general strikes have been called in Greece within a week, amid other forms of social, economic and political tension and misery already in play.

And the Greek tragedy looks set to spread: Ireland, Portugal, Spain and even Britain are said to be heading in a similar direction.

What a difference a few centuries can make. The afflicted countries include the cradle of Western civilisation and several European former colonial powers, where economic strength was their forte.

This week Moody’s Investors Service said “triple-A-rated” countries for debt rating such as Britain and the US have very stretched debt affordability, compared to Scandinavian countries and even Spain. Britain may have to borrow 12.8% of its GDP, more than twice the European average.

But Greece remains the icon for European financial disaster. Yet before anyone can even think of Greece having to resort to the IMF for a bailout package, the European naysayers would have their say.

France, Germany and the European Central Bank are among leading voices on the continent rejecting any thought of IMF aid for Greece. How could any proud European nation be seen to trade its sovereignty to an institution that had come to specialise in compromising Third World sovereignty?

It no longer seems to matter that Europeans had long dominated IMF policymaking. How could a neo-colonial institution be even thought to exercise its presumptuous prerogatives on (former) colonial powers?

Yet no policymaker in Europe could deny that Greece’s problem is serious, worsening and likely to spread across the continent. The result: get IMF-type benefits without the costs.

And so the idea of a European Monetary Fund (EMF) came to be advocated strongly by Europe’s heavyweights including the European Commission. Already, the standard pledges and assurances were on hand.

To allay fears in the international financial establishment, it was said that the proposed EMF would not rival the IMF.

Tough conditionalities were said to be certain and essential for any country in the eurozone seeking assistance.

The Greek finance minister himself said his country was talking to IMF officials, but only to seek “technical advice,” not financial assistance. And everyone else on the continent watches intently.

How typically East Asian things have become. What began as the 1997-98 (East) Asian financial crisis also saw a set of regional meltdowns, the work of scheming currency speculators and governments frantically searching for solutions.

East Asian nations then accelerated closer cooperation, even to the extent of floating the idea of an Asian Monetary Fund (AMF). But some of the European detractors who sneered at the idea now want a similar financial institution for Europe.

As a region, East Asia had surpassed Europe in growth rates and continues to do so. Since Europe already has an overarching European Union to serve regional needs and cushion “bubble shocks” on the continent that East Asia still does not have, the latter’s need for an AMF is even more acute.

Among the arguments against an AMF at the time were that Asians could not be trusted because they were too corrupt or spendthrift. Then after major cases of graft, financial mismanagement and budget deficits were exposed in the West, clearly no region or continent is immune from these scourges.

There is another reason for a regional monetary authority like the AMF or the EMF: more local accountability and democratic control. The supposed impartiality of the IMF has only meant an aloof manner and alienating policies often at odds with the interests of those in need.

The greater regional cooperation that comes from regional monetary funds is a bonus. If that also helps trade, growth and rising living standards, who can seriously object?

In time, there may be several regional monetary funds, each working more productively and efficiently to serve its founding purposes. By then, the future of the IMF might just come into question.

It would then beg the larger question of priorities: which is more important, the survival and prosperity of nations, or the continued existence of the IMF?

Recession Speeds Shift In Balance Of Power

The rise of China and India is redrawing geopolitical lines.

The Ascent of Asia

Nomura Global Economics

February 2010

This is the fifth and last in a series of edited excerpts from Nomura's recent report, "The Ascent of Asia."
 
World history has been dominated not by singular events but by processes that have gradually wrought fundamental paradigm shifts. In other words, human history, like geology and geomorphology, tends to be evolutionary rather than revolutionary. However, occasionally the earth's crust presents us with an apparently sudden seismic event, though this may be the result of tectonic tensions that have built up over a protracted period.

Historians are likely to identify Dec. 11, 2001--the date on which China joined the WTO--as the geopolitical equivalent of just such a seismic event, perhaps even more so than the terrorist attacks of Sept. 11 of that year.

This perspective--broadened to include Asia's other emerging major power, India--was summed up by authors Ronald Findlay and Kevin O'Rourke in their 2008 book, Power and Plenty: Trade, War and the World Economy in the Second Millennium, as follows:

"The gradual rise of India and China to their natural roles as major economic and political superpowers...[promises] to raise a variety of geopolitical challenges which as yet remain unpredictable. Indeed, history suggests that this could turn out to be the greatest geopolitical challenge facing the international system in the 21st century.

China has been aiming for comprehensive national power--i.e. economic, scientific, military, cultural, etc.--for more than 30 years, with economic growth the principal motor of these ambitions. And although India's evolution since its own seismic moment--the balance of payments crisis of 1991--has differed from China's, it too is pursuing a path towards comprehensive national power, also with the economy as its principal motor.

The consequent shift in the global economic center of gravity was already well underway before the beginning of the financial crisis--a crisis that has accelerated the change.

China today is much more self-confident and assertive than the pre-crisis model. As Sinologist professor David Shambaugh remarked to the International Herald Tribune: "[China] is not proving to be the global partner the United States and E.U. seek."

This was apparent at the December 2009 Copenhagen climate change summit, where Beijing proved to be the main obstacle to a comprehensive political agreement. Such assertiveness is not without its risks. Since then, China's relations with the West, particularly the U.S., have been at a low ebb, risking fueling protectionist pressures in the U.S. and the E.U.


As Charles Grant of the Centre for European Reform noted in a recent paper: "China's attitude to international relations is ultra-realist. It will take what it can get, while respecting power and facts. But China's leaders may have miscalculated by underestimating the impact of their harder line on Washington and European capitals."

Turning to India, as James Lamont put it in a recent Financial Times article: "[Delhi's] confidence in the growing economy has permeated other areas, too. Over the past year, India has sought to play a greater leadership role in multilateral forums debating trade, climate change and reforming the global financial architecture." What is less clear is how India is likely to project and build on its growing economic power.
India's economic transition owes much to a liberal vision that aims to generate growth through trade and interdependence, rooted in the--by the 1980s, increasingly apparent--failure of policy based on principles rather than pragmatism to achieve successive governments' domestic objectives in particular.

However, the choices India makes from here on are likely to be far from entirely domestically determined. As Rahul Sagar suggests in a 2009 International Affairs article: "...much depends on whether the existing great powers--America and China in particular--are willing to countenance India's rise."

Citing the U.S. as a potential barrier to India's rise may seem odd in the light of the Bush administration's decision to aid India's emergence as a comprehensive national power. But the oft-repeated rationale that India is America's "natural ally" may yet prove somewhat simplistic and/or short-sighted.

For now, Washington's focus remains largely on Beijing. But this could change if India succeeds in building the low-cost manufacturing base it needs to drive inclusive growth and provide employment for the additional 150 million people set to join the workforce over the next decade. In these circumstances, India stands increasingly to be America's--and Europe's--bete noire.

In the wake of the financial crisis, it remains to be seen whether the West can rise to the related challenges quickly enough to satisfy the aspirations of the emerging Asian powerhouses. As Philip Stephens of the Financial Times puts it:

"What can be said with moderate certainty is that a global system designed in 1945 will not survive the coming age of discontinuities. An order centred around the political, cultural and economic hegemony of the West can scarcely outlive the redistribution of global power."

Geopolitical uncertainty is likely to persist--and, indeed, escalate--in the years ahead.

Alastair Newton is senior political analyst at Nomura International. Before that taking the post in October 2008, he worked at Lehman Brothers and spent 20 years as career diplomat with the British Diplomatic Service. This is the fifth and last in a series of edited excerpts from Nomura's recent report, "The Ascent of Asia."
 
Source: SAlastair Newton, http://newscri.be/link/1044650

China’s Wen Rebuffs U.S. Calls for Stronger Currency

Bloomberg News

March 15 (Bloomberg) — China’s Premier Wen Jiabao rebuffed calls for the yuan to appreciate, risking a further deterioration in relations with the U.S. where lawmakers and economists say his stance is hampering a global recovery.

“I don’t think the renminbi is undervalued,” Wen said yesterday at a press conference in Beijing marking the end of China’s annual parliamentary meetings, using another term for the yuan. “We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency.”

Non-deliverable yuan forwards fell the most in more than a month as Wen’s remarks prompted traders to reduce their expectations for appreciation in the coming year.

U.S. lawmakers, including Senator Charles Schumer, are proposing that China be hit with stiffer tariffs to compensate for the unfair export advantage they say comes from an undervalued currency. Economist Paul Krugman estimates that global growth would be about 1.5 percentage points higher if China stopped restraining the value of the yuan, and after Wen’s comments said the U.S. should consider putting a 25 percent surcharge on Chinese goods.

“Chinese officials are alone in their refusal to acknowledge that the yuan is undervalued,” Senator Charles Grassley of Iowa, the ranking Republican on the Senate Finance Committee, said in a statement responding to Wen’s remarks. “If they choose to stick their heads in the sand, we’ll have to find another way to address this problem because it’s been going on for far too long.”

Yuan Forwards Fall

Non-deliverable yuan forwards fell 0.2 percent to 6.6425 per dollar as of 11:45 a.m. in Hong Kong today, the biggest decline in more than a month. The contracts indicate that traders are betting the currency will gain about 2.8 percent in the next 12 months.

Wen also urged America to “take concrete steps to reassure investors” about the safety of dollar assets, repeating concerns that he expressed a year ago, sparked by a growing U.S. fiscal deficit.

The U.S. currency has climbed about 7 percent from last year’s Nov. 25 low, according to the Dollar Index, a six- currency gauge of the greenback’s value.

Treasury Department figures show China’s holdings of Treasury securities dropped for a second month in December to $894.8 billion. Only Japan holds more Treasuries.

Wen, 67, echoed central bank Governor Zhou Xiaochuan’s comments that China needs to be cautious in ending crisis policies, which have included pegging the yuan at about 6.83 per dollar since July 2008 as the global financial crisis took hold.

One-Off Revaluation

The premier reiterated that the nation will keep the yuan “basically stable” and maintain a moderately loose monetary policy and a proactive fiscal stance. He said it’s “essential” for the timing of any policy changes to be appropriate.

“This is a sign that there will be no one-off revaluation in coming months,” said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong. “China’s top policy makers do have their own currency reform plans but coercion from other countries will do disservice to this cause.”

A bipartisan group of U.S. senators including Schumer, a New York Democrat, wrote Commerce Secretary Gary Locke last month, saying imports from China are being subsidized by that nation’s intervention in the currency market. Grassley, in his statement, said the U.S. should consider bringing a case against China’s currency policy at the World Trade Organization.

‘Strong Supporter’

The Chinese premier said that pressure for currency gains can amount to trade “protectionism,” adding that “I’m a strong supporter of free trade.” Protectionism affecting China will backfire because much of the nation’s trade involves foreign-invested exporters, Wen said.

The yuan rose 21 percent against the dollar between July 2005 and July 2008, before the government halted its advance to protect exporters. The dollar and the yuan have strengthened against the euro this year, pushing up the cost of Chinese exports in the European Union, the Asian nation’s biggest market.

Krugman, a Nobel Prize-winning economist, wrote in a March 14 New York Times editorial that China’s currency policy “seriously damages the rest of the world” and said Wen “absurdly” called the yuan fairly valued. A 25 percent surcharge on Chinese imports would force China to take action to revalue the yuan, he said.

‘Take a Stand’

“I don’t propose this turn to policy hardball lightly,” Krugman wrote. “But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.”

Ballooning sovereign debt and high unemployment around the world could send the global economy into a second, or “double dip” downturn, Wen said. In China, inflation, combined with wide income gaps and official corruption, could lead to social instability “and even affect the government’s hold on power,” he said.

Policy makers have made managing “inflation expectations” a key task for this year. February’s gain in consumer prices was 2.7 percent, compared with Wen’s target of about 3 percent for the year. Zhou said yesterday that while the increase was a little higher than forecast, it hadn’t altered the central bank’s plans.

China’s goal is to grow without stoking inflation and while adjusting an economic model that has led to an “‘unbalanced, uncoordinated and unsustainable’’ expansion, Wen said. Officials will maintain ‘‘appropriate and sufficient’’ liquidity and keep interest rates at ‘‘reasonable’’ levels, he added.

Tibet, Taiwan

Wen blamed strains in China’s relationship with the U.S. on President Barack Obama’s meeting with the Dalai Lama and American arms sales to Taiwan. He expressed hope for an improvement in ‘‘our most important diplomatic relationship.”

Asked about increasing dissatisfaction among foreign businesses in China over the investment climate, the premier sought to reassure international investors.

In January, Mountain View, California-based Google Inc. said it may close down its Chinese Web site because of alleged cyber attacks and China’s ongoing online censorship.

“China will unswervingly pursue the policy of opening up to the outside world,” Wen said. “Foreign businesses are welcome to come to China to set up businesses according to the law.”

Grow Your Brain

The best leaders have healthy brains

“In essence, every organisation is a product of how its members think and interact.”
— Peter Senge

LAST week at IMD Switzerland, I met brain researcher Terry Small, who posed a very interesting question: “What is the most important part of your body with regards to leadership?”

I immediately answered, “The brain.” Our emotions, intellect, knowledge and expertise all reside in the brain.
“Absolutely,” he answered. And he asked a second question: “So, if your brain is critical to leadership success, how many books on the brain have you read?”

I had to pause for a second as I knew he was right. If the brain is so important to leadership, why aren’t leaders more interested in knowing how to develop and grow a healthy brain? Thus began my exploration of the brain and leadership.

The brain is involved in everything we do. In Primal Leadership: Realising the Power of Emotional Intelligence, Daniel Goleman, Richard E. Boyatzis and Annie McKee demonstrate that leaders appointed solely on the basis of IQ and technical ability, lack the necessary emotional competencies to lead effectively.

They argue that high-performing leaders have both high EQ and IQ levels. Both are directly connected and controlled by the brain. The limbic system in the brain controls your emotions, impulses and drives, whilst your neocortex is the part of your brain that manages IQ, knowledge and learning.

Human emotions are brain-controlled and spread charismatically whenever people are near each other, even with no verbal contact.

When emotionally engaging leaders were observed, their followers harmonised most readily with the leaders’ ideas, and ultimately “caught” the leaders’ moods.

Mental exercise

High-energy and positive leaders like British entrepreneur Sir Richard Branson effortlessly transfers optimism to his followers, while the negative ones wear down their employees.

On the other hand, when a leader perceives a threat or is under stress, their brain acts differently and an “amygdala hijack” is likely to happen, where we act on impulse instead of reason.

A person with high emotional intelligence vetoes this hijack, but an “untrained” brain will not be able to prevent an “amygdala hijack” and there will be a reactionary response.

(The amygdala is the part of the brain that figures how we process and recall emotional reactions.)
Wang Laboratories, a top technology company in the 1980s, was destroyed by a bad decision that was highly emotional by its then leader, An Wang.

A leader’s ability to manage emotions is critical as emotions can compromise or sabotage your ability to make effective decisions.

Recently, I wrote about “gut feeling” and how our life’s wisdom and experiences are stored by the brain and retrieved when we face an emergency complex situation.

World-class leaders learn to develop their “gut feel” by managing an emotional brain part called the basal ganglia.

Interestingly, our brain actually gets better the more we use it. The same with our bodies – the more you use it the longer it lasts.

Since 1986, scientist David Snowdon studied 678 nuns of Mankato, many of whom lived past 100 years. He painstakingly collected data, tested them and dissected their brains after death. Among the findings of this study:

● An active intellectual life prolongs your brain’s lifespan and protects you from the effects of Alzheimer’s disease;
● Those who express the most positive emotions in their language end up living longest;
● The brain retains the capacity to change and grow stronger even in elderly people;
● Those who teach and are constantly challenging their minds live longer than folks who don’t; and
● Strong bonding develops positive emotional intelligence, which leads to a sharper mind.

After the Mankato nuns’ deaths, scientists were shocked to see that parts of the brains that generally wither with age did not do so in the brains of these women. How did these nuns manage to remain sharp and productive even after 100 years?

Researchers have found that intellectual stimulation of only 20 minutes a day can spur new neuron growth. Brain exercises were the norm for these nuns, who lived by the principle that an idle mind is the devil’s playground.

They wrote spiritual meditations in their journals, letters to their politicians and doggedly challenged themselves with quizzes, puzzles, and debates on current events.

Understanding the feelgood factors

Your brain has the capacity to continue to develop and grow. A growing brain keeps mastering the competencies of leadership – everything from self-confidence and decision-making to empathy and persuasion to running effective meetings – until it gets it right.

Our brain thrives on change and challenges. But in most cases, people resist change because of the pain of change. The brain’s main function is to keep you alive and resist pain.

Generally, the brain pushes back when instructed what to do. This is attributed to homeostasis, the movement of organisms toward equilibrium and away from instructed change.

On the other hand, your brain will release an adrenaline-like rush of neurotransmitters when you figure out how to solve a problem yourself rather than being told how to solve it by your bosses.

When I returned to Malaysia 10 years ago and helped in the turnaround of an organisation, one of the methods we deployed was to conduct mini action labs, where employees were given the opportunity to solve a problem, recommend and implement the solutions.

Within a short period, there was high engagement and the turnaround was swift and effortless, driven by the employees.

Compare that with numerous attempted turnarounds when a commanding CEO comes in and dictates the terms of the change.

There is usually huge resistance to the change and failure. Leaders who leverage brain-power will understand the need for engagement and employee participation in any change effort.

Our emotional brain has neural pathways that pump out streams of good feelings when a goal is accomplished and reduces feelings of worry and frustration in achieving the target. Great leaders use this in their change efforts too.

Leadership by reflection

Many leaders still hold on to the old adage of leadership by command and control. Instead, empathy and social intelligence is the way forward. A newly discovered brain neuron, called the mirror neuron, enables leaders to learn empathy.

Mirror neurons, discovered accidentally by Italian neuroscientists monitoring a monkey’s brain, show that the brain has neurons that mirror what others do.

“When we consciously or unconsciously detect someone else’s emotions through their actions, our mirror neurons reproduce those emotions. Collectively, these neurons create an instant sense of shared experience,” wrote Goleman and Boyatzis.

Additionally, mirror neurons enable leaders’ emotions and actions to be mirrored by their followers. This role-modelling was never truly understood until the mirror neuron discovery.

So, a leader’s action is more important than his words. The brain thinks in pictures not words.
Finally, if you really have no time to develop and grow your brain, the least you can do is keep your brain healthy.

Small’s research concludes that by just eating a few prunes a day, you “reduce the chances of Alzheimer’s disease by 92%.”

The brain is 80% water. So, drinking lots of water keeps it hydrated, and listening to baroque music increases your ability to learn by 25% to 400%.

Like you, I am on this new journey of discovering the power of the brain in leadership. For starters, why not invest 20 minutes of doing something outside your comfort zone each day? At least you will grow some new neurons!

Source: SCIENCE OF BUILDING LEADERS By ROSHAN THIRAN
● Roshan Thiran is CEO of Leaderonomics, a social enterprise providing leadership development and consulting services to MNCs. Leaderonomics will hold a “Becoming A Talented Manager” programme on March 24 and 25 at Menara Star, Petaling Jaya. To sign up, call 012-3070326 or login to www.leaderonomics.com for details.

Traders Extremely Bearish on British Pound

Traders make bearish bets on sterling - Bets against the currency more than when Soros beat BoE

COPENHAGEN - Futures traders are more bearish than ever on sterling amid concern that the currency's worst annual start in 13 years will continue as the United Kingdom's budget deficit approaches the Greek shortfall that roiled the euro. 

Wagers on the pound weakening against the dollar outnumber futures that profit on a rise by eight times more than when George Soros made $1 billion betting against the currency in 1992, the year Prime Minister John Major's Conservative government was forced to withdraw from the European Exchange Rate Mechanism. Sterling fell 19 percent that year. 

The pound has lost 6.2 percent in 2010 on speculation a budget gap will skewer the currency: Either record borrowing will push debt costs higher and force policymakers to print more money to buy bonds, or lawmakers will cut spending too fast and trigger a new recession. Prime Minister Gordon Brown's government estimates the deficit will hit 12.6 percent of gross domestic product, almost as high as the 12.7 percent in Greece that drove European leaders to consider a bailout. 

"The risk of a UK double dip is substantial," said Hans-Guenter Redeker, London-based head of foreign-exchange strategy at BNP Paribas SA, which predicts an additional 13.6 percent drop to $1.31 by the end of 2010. "Sterling is increasingly trading like an emerging-market currency with rising bond yields no longer working in favor of the currency." 

Ten-year gilt rates have climbed more than a percentage point in the past year, the fastest increase since mid-2004.

BNP, whose Sept 8 forecast for this quarter is closest to the mark in a Bloomberg survey, is now the most pessimistic of 36 strategists. After reducing their median prediction 2 percent in January, strategists cut it 3 percent this month, the quickest drop since September. Twenty-two strategists see the pound ending the year below 2009's $1.6170 close. 

Brown said on March 10 the economic recovery is "still in its early stages and remains very fragile". His Labour Party is locked in an election battle that may lead to the first parliamentary stalemate in 36 years and reduce the chances of enacting his five-year plan to cut the shortfall to 4.4 percent of GDP, which Fitch Ratings already has called "too slow". 

Sterling was at $1.5167 on Monday, up 0.7 percent for the past week. The currency slid 0.2 percent against the euro to 90.63 pence, down 2.1 percent this year. The pound is the only one of 16 most-traded currencies tracked by Bloomberg to weaken over the past six months against the euro. 

Strategists remain bullish on the pound even after cutting their forecasts. The median prediction of 35 analysts in Bloomberg's survey calls for a 4.9 percent gain to $1.59 per pound by Dec 31, down from a consensus of $1.67 on Jan 28.

The pound's drop may already reflect the deficit. At 4.098 percent, 10-year gilt yields are up 115 basis points in the past 12 months and were 103 basis points higher than German bund rates on Feb 23, the biggest gap in more than four years. 

Greek yields have risen as much as 139 basis points this year and closed at 6.25 percent last week. Gilt rates have risen no more than 22 basis points since Jan 1, peaking at 4.23 percent on Feb 22. British government debt was 55.8 percent of the economy in 2009, less than half of Greece's 113.4 percent, according to Goldman Sachs Group Inc. 

The UK isn't facing a financial crisis in the "foreseeable future", You-Na Park, an analyst at Commerzbank AG in Frankfurt, wrote in a March 10 note to clients. 

Bloomberg News

Wall Street shenanigans

Recent reports show how manipulative accounting and devious devices were used to enable Lehman Brothers and the Greek govt to ‘window dress’ their debts.

THE use of “innovative” financial instruments to hide a company’s or a country’s bad and deteriorating financial situation has been highlighted in recent cases that illuminate how manipulative accounting contributed to the global financial crisis.

Last week, a US government-directed report on the collapse of Lehman Brothers found that the investment bank used a device known as Repo 105 to hide up to US$50bil (RM165bil) of troubling securities that it held to give a good portrayal of its financial health, just months before it collapsed.

The Lehman failure in September 2008 almost triggered a domino effect of bank failures that could have caused a global financial collapse. This was averted by a desperate move by the US financial authorities to get Congress to agree to massive bail-outs of financial institutions.

A fortnight ago, it was also revealed that the investment bank Goldman Sachs had made use of another device, the derivative known as currency swap, to assist the Greek government in hiding its fiscal deficit which had ballooned above the level permitted by the European Union’s disciplines of being within the Eurozone.

Greece is now facing an enormous economic crisis that has threatened the status of the euro and a bailout is being worked out by European leaders. Goldman Sachs was criticised by German chancellor Angela Merkel for its role in the Greek tragedy and is under investigation by the US authorities.

It is important for developing countries like Malaysia to monitor such cases and learn the lessons. We should be on guard not to allow such manipulative and misleading devices to be introduced or misused either by international or domestic financial firms to avoid similar devastating consequences.

The two recently-revealed cases show how these giant financial firms of Wall Street have been operating with freedom in inventing and using financial instruments that are euphemistically termed “innovative” but which in fact are speculative and earn thumping profits for the firms or manipulative in hiding bad assets.

Attempts by the Democrats in the US Congress to pass a bill to tighten regulation of such financial activities have been stalled by Republican resistance.

This week, key Democrat Congressman Christopher Dodd, is expected to get his bill through an important Senate committee without the support of any Republican.

Meanwhile, German and French political leaders are trying once again to get the G20 to discipline financial speculation through controls over institutions like hedge funds and instruments like derivatives and credit default swaps.

However, they face opposition from the US and the UK which are the centres of hedge funds and speculative activities.

The 2000-page report on Lehman, by lawyer Anton Valukas, which a US bankruptcy court had commissioned, found evidence against the bank’s chief executive and financial managers for breaching fiduciary duties and its auditor Ernst and Young for malpractice.

The bank had used “Repo 105” transactions, which the report called an “accounting gimmick”, to keep US$50 billion of assets off its balance sheet and thus paint a misleading picture that it had less leverage or debt when it was time to publish its quarterly financial reports during the height of the crisis in 2008.

The Financial Times has explained the Repo 105 trade compared to a normal repo trade as follows. In a normal “repo” transaction, a bank transfers assets to a counter-party as collateral in exchange for cash.

The bank agrees to repay the cash plus interest and take the collateral back after a specified period. The assets remain on the bank’s balance sheet and it incurs a liability for the cash it is to repay.

In the Repo 105 which was used to reduce the bank’s portrayed leverage, the transaction is quite similar to a normal repo, except that the bank pledges assets worth 105% of the cash received from the counter-party.


The transaction is also described as a “sale” and the assets are removed from the balance sheet while the cash received is used to pay off liabilities, thus reducing leverage at critical moments such as when a financial report is being prepared.

The report concluded that Lehman’s use of Repo 105 was done to manipulate the balance sheet for deceptive appearance, affected its net leverage ratio and rendered its financial statements “deceptive and misleading.”

The revelations of manipulation have caused disgust even in Wall Street, according to the Financial Times which concluded that the report “sheds a damning light on the inner workings of Wall Street, or at least a part of Wall Street that was hell bent on juicing profits and hiding losses during the boom that led to the crisis.”

As to the Goldman-Greece affair, the New York Times reported on Feb 24 that US Federal Reserve is examining the financial stratagems devised by Goldman Sachs and other big banks to help Greece mask its ballooning debt over the last decade.

As explained by New York Times, in 2001, Goldman Sachs helped the Greek government to quietly borrow billions of dollars by creating a derivative (a currency swap) that essentially transformed a loan into a currency trade that did not have to be disclosed under European rules.

In 2005, Goldman sold the currency swap to the National Bank of Greece before reorganising it into a British legal entity called Titlos in 2008. Such deals – including similar financial transactions used by other European countries – have created an uproar on the Continent, drawing sharp criticism from Merkel and other leaders.

Goldman, however, defends Greece debt swaps. Mr Gerald Corrigan, chairman of Goldman Sachs Bank USA, the bank’s holding company, said it was “consistent” with the regulations of the time.

Greece’s Finance Minister George Papaconstantinou also insisted last week that his country was not the only one using such financial arrangements back in 2001. He added that such deals had now “been made illegal, and Greece has not used them since”.

Source: Global Trends By MARTIN KHOR