The Cadence of Finance

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Financial markets
Individual nance
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Conclusion
The Cadence of Finance
A look at the past, present, and future of nance
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David J. Moore, Ph.D.

www.efcientminds.com
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June 19, 2012
David J. Moore, Ph.D. The Cadence of Finance
A-E-F
Financial markets
Individual nance
Navigation
Conclusion
Outline
Comparison of accounting, nance, and economics The cadence of nancial markets
The cadence of individual nance
Navigating the system: your cadence
What have we learned today?
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Financial markets
Individual nance
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Conclusion
Outline
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Comparison of accounting, nance, and economics.
What is the difference?
Accounting Puts the numbers on nancial statements. In depth knowledge of accounting practices and legal requirements. Some nance knowledge as well. Finance Takes the numbers from nancial statements and makes decisions. Invest or not to invest? Re-structure or sell? Launch new product? Accounting and economics knowledge required.
Economics Study of the macro environment (unemployment, ination, foreign trade, industrial production, commodity prices, etc.) and the micro environment (how much would you pay for a premium hamburger?).
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Financial markets
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Comparison of accounting, nance, and economics.
Four major areas of nance
Investments Selection of stocks, bonds, and other assets to match investor risk tolerance and time horizon. Institutions The intermediation role of banks, insurance companies, and other nancial institutions. Markets The mechanics behind pressing the buy or sell button. Corporate Should my movie theater buy a fancy new popcorn machine (project selection), how much should I pay (cash ow analysis), and how should I pay for it (funding decision)?
In theory...
These are all useful elds and functions of the nancial system. However, there have been abuses...
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Outline
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The cadence of nancial markets
North Carolina railroad bonds 1868
Thought question
Who were the villains and victims in this case?

Source: Wikipedia and July 29, 1879 New York Times article.
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At the urging of General Milton Littleeld and his partner George Swepson, the state of North Carolina granted $27.8 million in bonds for a railroad project. Littleeld and Swepson allegedly created false bond certicates and received $4,000,000 for them that should have gone to the state of North Carolina. Now that investors have a loss of condence in all of the railroad bonds, railroad development stagnated for the next 11 to 12 years due to lack of funding. Littleeld and Swepson were tried but never convicted.
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Chicago, Saginaw, and Canada (CS&C) 1873
Thought question
Does this sound similar to new GM ability to use losses from old GM to avoid paying taxes?
Source: http://www.treasurydirect.gov/instit/statreg/fraud/fraud_historicalbond.htm#Chicago
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Another railroad bond case. I wonder if stories like these relate to the etymology of railroaded. In 1873 CS&C issued gold-backed bonds to raise money for a railroad project at a face value of $1,000. In 1876 CS&C went into bankruptcy, a predecessor to CSX bought CS&C assets but not the debt. Bondholders received < $0.25 for every $1.00 they invested.
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Goldman Sachs 1928-1932
In 1928 Goldman Sachs formed the Goldman Sachs Trading Company, issued shares to the public @ $104, and embarked on a speculative binge. The Great Depression hits a year later in 1929. In 1932 those $104 pieces of paper are now worth $1.75. Mr. Sachs of Goldman Sachs testies before the Senate. No SEC therefore no nes.
Thought question
What happened to the $104 - $1.75 = $102.25?

Source: Aftershock by Robert Reich.
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Bank of America / Merrill Lynch 2009-2010
Thought question
What happened to the $5.8 billion bonuses (damages if you will) - $0.150 billion settlement = 5.65 billion? Do you think any employees returned their bonuses?
Source: 2011.11.28 USA today Judge rejects $285 million SEC-Citigroup agreement
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Allegation: failed to disclose paying $5.8 billion in bonuses to employees while recording a $27.6 billion loss. The initial settlement of $33 million (0.033 billion) was rejected in 2009. The nal settlement of $150 million (0.150 billion) was accepted in 2010 but the judge called the settlement half-baked justice at best and said the court approved it while shaking its head.
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Citigroup 2011
Judge rejected $285 million dollar settlement of allegation of betting against investors (read: customers of Citigroup) of complex mortgage securities. Why? No admission of wrongdoing.
Thought question
$700 million invested - $95 million possible recovery - $160 million prot by Citigroup - $285 rejected settlement = $160 million. Where did that go?
Source: 2011.11.28 USA today Judge rejects $285 million SEC-Citigroup agreement
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Citigroup made $160 million, investors lost around $700 million. The investors may recover $95 million.
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Bank of America / Merrill Lynch 2012
An example of the mixing of investment banking and commercial (regular) banking.
May 8, 2012 B of A / ML reach a $315 million settlement with federal judge.
Thought question
What happened to the $16.5 billion - $0.315 billion = $16.185 billion?

Source: 2012.05.08 Reuters Merrill $315 million mortgage pact wins OK from Rakoff
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Sounds like a lot? Not really. B of A / ML allegedly mislead investors about the risks of $16.5 billion of mortgage backed securities.
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Yahoo 2012
Yahoo management rejected the Microsoft $33/share offer back in Q1 2008.
Yahoo stock closed at $12.50 later that yea on 2008.11.07. Today: about $15.
Source: 2012.05.06 Nashua Telegraph Pressure mounts on Yahoo over CEO background
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Yahoo CEO claimed to have computer science degree but does not. An inadvertent error. The Yahoo board chairman who picked the CEO also misrepresented their own education credentials. An example of ego, mismanagement, and deception.
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Wealth gap
Source: The Urban-Brookings Tax Policy Center 7th Annual Tax Day Forum
Okay. This is obviously not in best interest of everyone. Perhaps the U.S. income progressive tax structure makes this more reasonable...
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Wealth gap
Nope...
Source: The Urban-Brookings Tax Policy Center 7th Annual Tax Day Forum
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Why? Chrysler, Toyota

Chrysler imported from Detroit
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Toyota
Chryslers 200 sedan engine is from Mexico. A recall occurred due to defects in that engine. Chrysler has a unionized workforce. But what about the non-Chrysler employees in Mexico? Net effect: fewer but higher paid union workers combined with many lower paid (read: exploited) Mexican workers.
Toyota factories in Kentucky and Tennessee are non-union. Net effect: more workers than in Detroit but lower pay and benets End result: Executives (read: the top 1%) get paid in both cases for cutting costs.
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Apple
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2011 prot per employe of $400,000 exceeded Goldman Sachs, Exxon Mobil, and Google. The largest US Corporation by market capitalization employs 43,000 employees in the US and 20,000 overseas. Apple contractors employ over 700,000 overseas. Those employees make $17 to $25 per day in work conditions that would be illegal here in the US. In contrast GM employed over 400,000 in the 1950s. Apple with nearly $100 billion in the bank in short and long term investments funnels those investments through a Nevada corporation to avoid paying California state income tax.
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Source: New York Times 2012.01.24, Apple, America, and a Squeezed Middle Class
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Apple thought questions
1. Does it seem fair that the same company that asks California schools to adopt their products such as e-Textbooks is the same company that avoids paying taxes in California?
2. How about paying taxes in the state so state schools have money to buy your products? 3. Would those missed taxes help reduce or eliminate the tuition raises due to lack of tax revenue? 4. How about paying taxes in California so my salary can be higher? 5. Do you think executives receive bonuses for cutting costs just like Chrysler and Toyota?
6. Do you think Apple could employ a couple hundred thousand US workers, pay some more taxes, and have $20 billion in the bank instead of $100 billion?
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Bank of America again
The bailed out, slapped-on-the wrist, crooks at B of A laid off 30,000 workers (the 99%). Again: executives (the 1%) get paid for cutting costs
Do I even need to mention the failed attempt of B of A to charge $5/month if you use your debit card as a debit card?
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Since I did, B of A would prefer you to use the debit card as a credit card so they can collect 2% per transaction instead of a capped 24 cents. But who pays the 2%? Either the merchant accepts reduced prots or the consumer pays via higher prices on goods and services. In either case, wealth is transferred to the bank. The banks must accept reduced prots given the government regulation capping the interchange fee for debit transactions.
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Source: ABC news, Bank of America Conrms 30,000 layoffs
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Other nancial institutions
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Headline: Evicted Detroit woman, 101, not allowed back into home due to unsafe conditions. Wrong: home was good enough to appraise for the mortgage but not good enough to live in? Wrong: Son took out reverse mortgage. Who knows what happened to the money. Wrong: Bank would even issue such a mortgage. Wrong: Bank/HUD would take the home away from this woman and place her belongings on the curb. Wrong: Bank prots from loan fees and now can sell the home and prot some more. The bank essentially placed a bet with this mortgage. Why cant they take a loss for their failed bet?
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Not supposed to talk about this...
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Republicans oppose increasing taxes. They fought hard during the debt ceiling crisis to preserve the 15% capital gains tax. It used to be 20%. The Obama administration wants to maintain the 2% temporary cut in Social Security taxes for another year. Republicans oppose the 2% tax break because we cant afford it. Hypocrisy: preserve the 5% tax cut that benets the few wealthy (1%), eliminate the 2% tax cut that benets the many poor (99%). What percentage of your income should be nancial income to be better off with the Republican tax cut? The answer is 71%. So, if 71% or more of your income is from nancial instruments and not labor, vote republican to save your taxes. If most of your income is from your job (salary and wages), voting for the Obama administration puts more money in your pocket. In other words, if you do not have lots of stock, voting republican makes the wealthy wealthier and you poorer. You are transferring your own wealth to those who are already wealthy.
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Dialectical reasoning
From thesis to anti-thesis to synthesis.
Our politicians in Washington are currently debating on how to pay for the maintenance of subsidized student loan interest. If they do not reach a solution soon the rate on student loans will double in July. Democrat thesis: the wealthy are making too much money, raise their taxes to help these college graduates.
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Republican anti-thesis: Social welfare programs like medicare and medicaid need to be cut since they are wasteful. Cut those programs to help these college graduates. Who his coming up with the synthesis?
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You are both correct. The wealthy are making too much and social welfare programs are wasteful. Pay for this bill by taking half from tax increases on the wealthy and half from cuts to social welfare programs. Then we can move on to the next issue.
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Signs of hope
My Toyota Camry was built in Georgetown KY with roughly 80% US sourced parts. My kitchen rug was made in the USA.
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The new furniture in the faculty lounge was made in Jasper Indiana. There are some rumors of the next Xbox being made in Texas. Intel is nearly nished with a multi-billion dollar state of the art factory in the Phoenix area. They are actively hiring. The young minds in this room are attentive and are thinking about the topics of this presentation.
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Forget investing in Facebook
Lead underwriter Morgan Stanley does not allow its employees to use Facebook. Goldman Sachs and Citigroup, among others, are in on the deal. The only ones who are going to make real money are the Facebook executives and investors in the primary market.
Thought question
Does this sound similar to railroad bonds, the pre-depression Goldman Sachs Trading Corporation, and the recent mortgage derivative debacle?
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FB: $100 billion, me: $17B. Slowing growth in most recent quarterly ling. Before IPO: Lead bankers to release more shares to meet demand. Day of IPO: Lead bankers purchase shares to stabilize the price. Suddenly Facebooks advertising problem is a problem. - Atlantic Wire
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Banking and buying

Choose credit unions over big banks.
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Nonprot depository institution Owned by members with common bond (employer, geography, etc.) Investment banking funds (speculative investing) not mixed up with regular banking funds (checking accounts, mortgages) Sodas vs. water at fast food restaurants, Starbucks, liquor at bars, cigars, extended warranties for USB drives, BMW vs. Lexus vs. Toyota. Use your credit union (or bank) auto-purchase department if buying a new car. Decline all dealer add-ons. Credit unions tend to have higher deposit rates and lower borrowing rates. That is why I recommend them to you.
Minimize high-margin exposure.
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Finance, economics, philosophy
The nancial system does have legitimate productivity enhancing functions.
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Connecting providers of capital (investors) to those seeking capital (businesses) Transaction costs reduction Development of securities tailored to individual risk preferences
The nancial system also has a history of misleading investors, raking in the money, and paying little or no nes. Although taxes are an issue, the bigger problem is reversing the widening income gap. Consider applying dialectical reasoning more often. There are signs of hope. Finally, be mindful of how business attain their prots and of high-margin exposure.
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The Cadence of Finance

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A-E-F

The Cadence of Finance

A look at the past, present, and future of nance

David J. Moore, Ph.D.

June 19, 2012

David J. Moore, Ph.D. The Cadence of Finance

The cadence of individual nance

Navigating the system: your cadence

What have we learned today?

David J. Moore, Ph.D. The Cadence of Finance

The cadence of individual nance

Navigating the system: your cadence

What have we learned today?

David J. Moore, Ph.D. The Cadence of Finance

Comparison of accounting, nance, and economics.

What is the difference?

David J. Moore, Ph.D. The Cadence of Finance

Comparison of accounting, nance, and economics.

Four major areas of nance

David J. Moore, Ph.D. The Cadence of Finance

The cadence of individual nance

Navigating the system: your cadence

What have we learned today?

David J. Moore, Ph.D. The Cadence of Finance

The cadence of nancial markets

North Carolina railroad bonds 1868

Who were the villains and victims in this case?

David J. Moore, Ph.D. The Cadence of Finance

The cadence of nancial markets

Chicago, Saginaw, and Canada (CS&C) 1873

David J. Moore, Ph.D. The Cadence of Finance

The cadence of nancial markets

Goldman Sachs 1928-1932

What happened to the $104 - $1.75 = $102.25?

David J. Moore, Ph.D. The Cadence of Finance

The cadence of nancial markets

Bank of America / Merrill Lynch 2009-2010

David J. Moore, Ph.D. The Cadence of Finance

The cadence of nancial markets

David J. Moore, Ph.D. The Cadence of Finance

The cadence of nancial markets

Bank of America / Merrill Lynch 2012

An example of the mixing of investment banking and commercial (regular) banking.

May 8, 2012 B of A / ML reach a $315 million settlement with federal judge.

What happened to the $16.5 billion - $0.315 billion = $16.185 billion?

David J. Moore, Ph.D. The Cadence of Finance

The cadence of nancial markets

Yahoo management rejected the Microsoft $33/share offer back in Q1 2008.

David J. Moore, Ph.D. The Cadence of Finance

The cadence of individual nance

Navigating the system: your cadence

What have we learned today?

David J. Moore, Ph.D. The Cadence of Finance

The cadence of individual nance

David J. Moore, Ph.D. The Cadence of Finance

The cadence of individual nance

David J. Moore, Ph.D. The Cadence of Finance

The cadence of individual nance

Why? Chrysler, Toyota

David J. Moore, Ph.D. The Cadence of Finance

The cadence of individual nance

David J. Moore, Ph.D. The Cadence of Finance

The cadence of individual nance

Apple thought questions

David J. Moore, Ph.D. The Cadence of Finance

The cadence of individual nance