Some Musings on Citi

I have some further thoughts on the Citigroup bailout at Portfolio.com.

UPDATE: Great minds think alike, apparently. On Tuesday, both the New York Post and Wall Street Journal endorsed one of my suggestions, which is that the board of Citi be pushed out. The Post did so in its usual understated manner:

[The Journal] asked:"When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi's dubious investments, how can these men possibly deserve to remain on the board?"

"If taxpayers have to risk so much to save Citigroup, then regulators should at least exert the discipline to break up this behemoth so it is never again too big to succeed, much less fail," the Journal concluded.

In a brief statement in response, Citigroup said its board "has diligently carried out its responsibilities during one of the most severe market downturns in decades."

The tabloid Post published photos of current board members as well as former director Rubin under the headlines: "Bozo bankers" and "Off with their heads".

"Some of them are already gone," the Post said. "If those who remain had any sense of decency, they'd simply quit."

Actually they're not bozos, which is the tragic part of this whole thing.

© 2008 Gary Weiss. All rights reserved.

Timothy Geithner the Economist

I'm intrigued by the number of times I see incoming Treasury secretary Timothy Geithner referred to as a practitioner of the dismal science. See Bill Kristol's column in the New York Times today:

Given that, one has to welcome the expected appointment to senior positions in the Obama administration of economists like Lawrence Summers, Timothy Geithner, Jason Furman, Peter Orszag, and Goolsbee himself. They’re sober and competent people who know we face a real crisis — and who, importantly, may be more willing than many of their colleagues to adjust their thinking early and often. [emphasis added}

Kristol's column is entitled "Admit We Don't Know," in reference to the size of the bailout package. I admit we don't, but at least we should know whether the guy who who'll be in charge of the bailouts is a friggin' economist. I mean, it was in my Geithner profile in Portfolio. That he isn't.

© 2008 Gary Weiss. All rights reserved.

Citigroup, U.S., Contemplate Compost Pile

You know the world is going to hell when financial news resembles something you might see on the Comedy Channel. I see that Citi and the U.S. are considering formation of a compost pile.

I'm not kidding. Citigroup and the U.S. government are in talks to create a "bad bank" to hold toxic crap from Citi's balance sheet. Here's the Wall Street Journal Online article.

Here's an outline of what is under discussion, according to the Journal:

Citigroup Inc. is nearing agreement with U.S. government officials to create a structure that would house some of the financial giant's risky assets, according to people familiar with the situation.

While the discussions remain fluid and might not result in an agreement, talks were progressing Sunday toward creation of what would essentially be a "bad bank." That structure would help Citigroup cleanse its balance sheet of billions of dollars in potentially toxic assets, these people said.

The bad bank also might absorb assets from Citigroup's off-balance-sheet entities, which hold $1.23 trillion. Some of those assets are tied to mortgages, and investors have worried such assets could cause heavy losses if they land on the company's balance sheet. . . .

Under the terms being discussed, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The federal government would cover losses beyond that level, people familiar with the matter said. One person said the new entity is expected to hold about $50 billion of assets.

Now, what will be demanded of Citi in return for the taxpayers taking all this crud from Citi's balance sheet? Any curbs on compensation and its dividend, now yielding 17%? Any change in management? Any well-deserved pain?

Or does Citi reap this dose of government laxative, in return for stabilizing the financial system it destabilized by buying all this crud, and in return has to sacrifice nothing? Stay tuned.

UPDATE: The "compost pile" discussed in the early report (quoted above) ultimately morphed into a straight-up rescue package. The article linked above now says as follows:

Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies -- the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. -- will take on any additional losses, though Citigroup could have to share a small portion of additional losses.

So instead of the sewage being dumped into an off-balance-sheet compost pile, it will continue to fertilize the Citi balance sheet but Citi will not reap the consequences of all but a small part of its lousy decisions.

Citi's obligations in return for this bailout:

The government didn't require Citigroup to make changes to its executive ranks or its board in return for government assistance. However, Citigroup agreed to "comply with enhanced executive compensation restrictions," the government said Sunday, and also will implement a government-backed plan to modify distressed mortgages that is designed to curb foreclosures.

And this still may not be enough to rescue Citi.

It will be interesting to see to what extent Bob Rubin was involved in crafting this bailout package. His close relationship with Tim Geithner and Larry Summers puts him in tight proximity to both the New York Fed and incoming Treasury Department. CJR's Audit column notes that Rubin's role at Citi is going to be scrutinized.

© 2008 Gary Weiss. All rights reserved.

Tim Geither for Treasury Secretary.... Now?

Yesterday Gail Collins had a column suggesting that the time has come for President Bush to step aside and Obama to take his place. Now, I've loved Gail's writing since her salad days at the Hartford Advocate, but I'm never sure to what extent she is serious (10%? 80%?). I was going to respond with a completely serious suggestion that Tim Geithner become Treasury secretary now. However, I see that Tom Friedman got there first.

I don't have much to add to Friedman's column, except to suggest that we all gaze again at this chart of the Dow's action on Friday.



Note how the market rallied at precisely 3 p,m., which was when Geithner's appointment first was announced on NBC. It was the usual crappy day in the market, beginning with a rally that fizzled, after two straight days of horror. Then the market got word that Geithner was named Treasury secretary and the market shot up.

I don't think the reason this happened has as much to do with Geithner as it does with the fact that the market wants something, anything, to indicate that someone is taking charge of this puking economy.

Clearly the markets have lost every shred of confidence in this administration and, in particular, this Treasury secretary. Replacing Bush right now is not a terrible idea, but it's not happening. Replacing Hank Paulson isn't happening either, but it is closer to being something other than a fantasy. The country needs a change in economic leadership. Now.

By the way, isn't this ironic? A former CEO of Goldman Sachs is unable to inspire Wall Street, while a lifelong bureaucrat and policy wonk is able to pull it off.

© 2008 Gary Weiss. All rights reserved.

Corporate Fraud Update, Overstock.com Department

My favorite corporate sleazebags, the management of Overstock.com, are the subject of two excellent posts over the past few days by my fellow white color crime aficionados, reformed felon-turned antifraud crusader Sam Antar and forensic accountant Tracy Coenen.

Overstock is a worthy subject for several reasons, notably (for me at least) its sustained effort to silence critics. These two latest blog posts do an excellent job at something the SEC has failed to do, which is to call this company's management to account.

Tracy's post, here, is an excellent digest of the ongoing Overstock train wreck. Sam today describes the kind of legal peril that theoretically faces the company because of its disclosure violations.

I say "theoretically" because Overstock has gotten away with murder in the face of an indifferent SEC. Let's hope that one of the things President-elect Obama will be changing is a federal securities apparatus that has given up on enforcing the securities laws.

Tracy's rundown of Overstock's long list of transgressions is worth repeating:

[One constant over the past two years] has been the criticism of fans of Patrick Byrne and Overstock. Byrne has been trying to silence his critics, and even went so far as to hire cyberstalker Judd Bagley to threaten and intimidate the company’s critics.

The fact always remained that there were inconsistencies in disclosures, unusual financial statement items, and a general appearance that management at Overstock.com was not forthcoming in its presentation of financial results. The questionable matters included:

• Claiming the company was improving, while financial measures showed a decline
• Assertions about inventory levels, quality, and reserves
• Failure to disclose a SEC subpoena of Patrick Byrne until almost a year after it was issued
• The mysterious departure of members of the Overstock.com Board of Directors
• Patrick Byrne’s tendency to spend time posting on message boards, rather than trying to run his terrible company
• Manipulation of earnings numbers in an attempt to make the business appear better than it is
• Violation of Regulation G, according to SEC guidance on EBITDA calculations
• The tendency to engage in “Black Ops” on the internet when negative financial information is around the corner
• More manipulation of earnings numbers
• More pretend conspiracies courtesy of Patrick Byrne
• Lies and questions about the company’s adherence to GAAP
• False statements about the SEC’s closure of its investigation of Overstock.com
• Repeated irregularities in the financial statements and disclosures made by Overstock.com
• Materially overstating EBITDA
• Massive losses year after year, accumulating to almost a quarter of a billion dollars by mid-2008

The critics kept writing, and now the truth comes out. Byrne and his paid stooges continuously tried to discredit the critics, claiming there was some conspiracy to take down Overstock. The truth has always been that Overstock.com is a horrible company run by an incompetent and mentally unstable CEO.

In the latest Overstock screwing of its investors, the company on Friday announced plans for yet another secondary stock offering. That's what failing companies do: when they can't sell products, they sell stock.

Clearly Overstock CEO Patrick Byrne believes investors are as dumb as he is inept, which is saying a lot. The stock sold off sharply just before the Friday announcement, indicating to me that at least some investors -- the ones with inside information -- know better than to hang on to this dog.

© 2008 Gary Weiss. All rights reserved.

The Market Loves Tim Geithner

Nobody ever knows for sure about such things, but I thought it was remarkable how the market reversed its losses and really took off after NBC reported that Tim Geithner was being named Treasury secretary.

He's an understandable choice: a low-key guy, experienced, with an international background. Just the sort of cabinet pick you might expect from no-drama-Obama. More on Geithner in my profile of the gent for Portfolio, here.

Note the strong connection between Geithner and another candidate for Treasury, Larry Summers.

And, by the way, contrary to an early report in the online Wall Street Journal, he is not an economist.

© 2008 Gary Weiss. All rights reserved.

Who Says We're Not in a Depression?

The market isn't the only indicator. This is beginning to feel like a Depression. Note the photograph that has been circulating recently about the man in midtown Manhattan begging for a job.



That's straight out of the Great Depression:



One difference: the gent in the Depression photo had been out of work for three months. According to the New York Times caption, the man in the photo on top had been looking for work for nine months.

© 2008 Gary Weiss. All rights reserved.

Who's Worse, Mark Cuban or the SEC?

I have to admit, it's a close question. Joe Nocera makes the point that the SEC, by pursuing this "boorish" billionaire while not giving a damn about, for instance, Overstock.com's restatement of years of financials, proves that the SEC is sinking into irrelevance.

Now then — don’t you sleep better at night knowing the feds are bringing rich guys like Mark Cuban to heel? No? Neither do I. In fact, if the case illustrates anything, it is how far the Securities and Exchange Commission has descended into irrelevance since Christopher Cox became chairman. That has become even more obvious since the financial crisis broke.

Cuban, meanwhile, has made the case for Cuban by having his lawyers try the case in his blog by raising what strikes me as a bit of a red herring.

Cuban claims he was not specifically told the information that he received was confidential. But, even if he wasn't told it was confidential, it clearly was "material, non-public information." He sold in advance of the public getting that info, a la Sharesleuth.

As I said yesterday, I'm underwhelmed by the SEC's case against Cuban. But I'm equally underwhelmed by Cuban's "defense," which indicates to me, once again, that this guy has an ethical blind spot a mile wide.

The expression "pox on both their houses" comes to mind. No, I sure as hell won't be sleeping any better knowing that the SEC is pursuing this sleazeball, but I'm equally sure as hell that I won't be losing any sleep over it.

UPDATE: Aaron Task suggests on Yahoo Finance that Cuban may have had "too many powerful enemies." I agree, and the enemy is Mark Cuban. The more I look at the case against Cuban, and his response to the charges, the less underwhelmed I am with the SEC's case.

© 2008 Gary Weiss. All rights reserved.

More on the Overstock.com Spam Campaign

The Overstock.com p.r. genius is producing more dividends for this slimy company. The website Microcap Speculator, also a target of the spam campaign I noted a few days ago, reacted in an annoyed post today.

Two questions:

1. Does anyone really believe that Patrick Byrne “learned at the knee of Warren Buffet”?

2. Why has Overstock.com hired a “”consultant” to promote Patrick Byrne personally as a market guru? Look at the chart below…hasn’t the Wrath of Byrne already hurt shareholders enough? Seriously, OSTK would shoot up 15-25% if Byrne resigned.

Microcap Speculator noted that the "consultant" hired to promote this spam, Chris Jones, has a Linked In page. I had withheld Jones's name in the belief that he was an out-of-work journalist hard up for any kind of work (and I do mean any kind), but according to the link he is also currently employed as a "general assignment reporter at 2News."

In addition to working as a reporter, Jones also lists on his resume: "Advise and consult Chairman and CEO of Overstock.com, Dr. Patrick Byrne, regarding media, public relations and marketing initiative."

Assuming that is up to date, his working simultaneously as a journalist for a bona fide news organization definitely puts him in a conflict of interest situation, and a creepy one at that, given Byrne's propensity for smearing the press.

© 2008 Gary Weiss. All rights reserved.

Mark Cuban Nailed By the SEC

Mark Cuban in happier days

I'm not a fan of Mark Cuban's more or less defunct Sharesleuth website, which he financed by grotesquely unethical, though apparently not illegal, pre-publication trading in stocks mentioned on the site. So I was intrigued to learn that Cuban was nailed by the SEC today for alleged insider trading in the stock of something called Mamma.com.

Here are the particulars from the SEC website.

It's an interesting complaint, by the way. According to the SEC, Cuban became an "insider" because the CEO of the company told him about an upcoming PIPE deal. Does that mean that if I own shares, a CEO can make me an "insider" by calling me and blurting out some inside information?

I guess so. Doesn't seem fair, and it will be interesting to see how this plays out. I see that Cuban is vigorously protesting his innocence. I also see that, for now at least, he is not being criminally prosecuted.

Here's what I wonder: if this case is as open and shut as the SEC makes it out to be, why did it take four years to bring charges?

© 2008 Gary Weiss. All rights reserved.

Overstock.com's Latest Gambit: Email Spams to Promote Its Wacky CEO

The corporate fraud poster boy Overstock.com, having just restated its financial results going back to the time of Copernicus, has invested its scarce cash in a new but typically slimy tactic: email spams.

Now, the purpose of this spam was not to clear out the company's inventory of schlock goods or otherwise promote this third rate internet retailer. That would be too much like a "legitimate corporate purpose," and thus would detract from Overstock's downward slide into bankruptcy. No hyping of toilet bowl necklaces by this commode of a company. The aim of the spam was rather to personally promote, and rewrite history about, its wack-a-doo CEO, Patrick Byrne.

The spam that went out yesterday to the media -- including me, which proves it's a brainless robot-mail -- promotes a Youtube video that provides out-of-context excerpts to "prove" that Byrne "predicted" the latest calamity. He didn't, of course. He "predicted" that the world would collapse because of his "stock counterfeiting" obsession. He actually spoke in favor of one leading subprime lender, Novastar Financial, on a stock message board, long after subprime began its slide into oblivion. I'm sure that his small coterie of brainless followers snapped up Novastar's worthless stock as a result.

I don't want to get the fellow who did this in trouble, so I'll blank out his name. Evidently he is a former journalist who was canned recently and will do anything -- I mean anything -- for money. After trying his hand as a stockbroker (great timing), he apparently decided that flacking for Byrne was right up is alley. He is a new name in the Overstock pantheon, and apparently was hired just for the purpose of obtaining ego-stroking TV appearances for Byrne.

The email reads:

from xxxxxx@overstock.com
to
date Fri, Nov 14, 2008 at 1:28 PM
subject What's Next?
mailed-by xmr3.com

Gary

The “shock” of the financial meltdown has passed, now comes, the “awe,” and with it plenty of questions. Primarily, “What’s next?” Is there another bubble brewing? What happens if millions of Americans begin to default on their credit card debt?

Overstock.com chairman and CEO Patrick Byrne, says we are less than 50% of the way through the mess, he predicted the coming of this current crisis many times before, starting 3 years ago, Watch this montage to see Byrne’s predictions beginning in 2005: [spam link excised]

Today Byrne is suggesting one of the following scenarios could occur in the coming years:

*Reagan Recession: A deep retraction reminiscent of the recession under Reagan in the early 80’s.
*The lost decade: A protracted recession similar to the one suffered by Japan in the 90’s.
*Great Depression: A severe economic dip on par with the Great American Depression in the early 30’s.
*Mad Max: Not likely, but still possible, a catastrophic breakdown of society with mass shortages of energy, food, and water.

Dr. Patrick Byrne has learned at the knee of Warren Buffett, the greatest investor of all time. As a child Byrne’s parents would allow him skip school so he could spend time and get an education from the “Oracle of Omaha.”

He survived cancer, to go on to get a Bachelor’s in Philosophy and Asian studies from Dartmouth, a Master’s of philosophy from Cambridge, and a Doctorate of philosophy from Stanford. He founded Overstock in 1999, and in 2007 the company generated nearly a billion dollars in revenue.

Byrne is an experienced and pithy commentator, if you’d like to speak with him I’d be happy to arrange it.

Thanks for you time and have a great week.

xxx

xxxxx@overstock.com
(o) 801- xxx-xxxx
(c) 801- xxx=xxxx

I wonder how Warren Buffett feels about his name being constantly bandied about by Byrne and his paid shills. I know how the company's comatose board of directors feels about Byrne using Overstock's corporate resources to spread lies about his past rants: they turn over and get more sleep.

© 2008 Gary Weiss. All rights reserved.

Fallout From Busted Boiler Rooms

A recent, unpublicized indictment in Florida (nope, no web links available) is a good example of how boiler room crooks manage to keep their ill-gotten gains, even after they've been thrown in jail.

The feds recently indicted a fellow named Roy Ageloff, who was prominently featured in my book Born to Steal. Ageloff ran the Hanover Sterling boiler room and other crappy little firms that sold "chop stocks" -- worthless stocks sold at high prices to retail investors, with brokers compensated by undisclosed kickbacks.

The SEC and NASD pursued this guy long after the investors were fleeced, because, in addition to their usual incompetence, they were obsessed with "naked shorting" of the Hanover stocks. The FBI only stepped in after my Business Week articles in late 1996, which disclosed how Hanover and other firms had mob links.

Ageloff pleaded guilty to felony counts for his crimes and spent two years in prison.

Now, here's where it gets good. A new indictment, handed up recently in Flordia, accuses Ageloff of successfully hiding assets, to avoid a restitution agreement. With the alleged help of his brother, he supposedly did that by putting the money into movie deals and other ventures. He also sent the money overseas.

Ageloff has pleaded not guilty and is vigorously fighting the charges. Apparently whatever money he had is not accessible, as he's been using the services of the public defender and defending himself pro se.

The thing that strikes me about this indictment is not that Ageloff is accused of these things, but that he did a lot of it while in prison. While behind bars he had access to "telephones, e-mail, mail and visits." I guess such things are monitored, or if they are they are monitored by dopes.

The end result is that the people who were ripped off by Ageloff and his crews got bupkis.

© 2008 Gary Weiss. All rights reserved.

Are We Ready to Surrender Just Yet?

Time to surrender, don't you think?

Lawrence Fink of BlackRock says so, and he means it in a nice way, which is a sign of the times I guess.

Bloomberg reports:

BlackRock Inc. Chief Executive Officer Laurence Fink said he's seeing signs of ``capitulation'' in financial markets, a broad selloff that usually proceeds the end of a bear market.

``A year ago, I said we won't see a bottom until we see a capitulation,'' Fink, whose company is the largest publicly traded asset manager in the U.S., said today at an investment conference in New York. ``We are seeing a capitulation'' and financial markets may begin to recover by mid-2009, said Fink, 56.

Me, I'm a pessimist. I think this market's got a lot of fight left in it. Surrender? Hell no! This market is filled with piss and vinegar, and will die rather than capitulate.

Yessirreeeebob.

© 2008 Gary Weiss. All rights reserved.

The Overstock.com Laugh-Fest Continues

When the SEC dropped its investigation of Overstock.com despite in-your-face evidence of improper conduct, I said that the SEC had demonstrated that it was useless in dealing with corporate misconduct.

Today we can see just how useless it has been, and as usual the company's latest SEC filing provides the answer. Ex-felon fraud fighter Sam Antar points out today that Overstock admits that its financials invite litigation and regulatory action.

Sam reports:

Overstock.com’s (NASDAQ: OSTK) new amended financial reports filed today, vindicates findings, first exposed in this blog, that the company violated Securities and Exchange Commission Regulation G governing non-GAAP disclosures, such as EBITDA and materially overstated its non-compliant EBITDA in financial reports dating back to Q2 2007. Even worse, Overstock.com disclosed in its 10-Q for Q3 2008, released today, that its restatement of financial reports dating back to 2003, due to accounting errors relating to revenues, customer refunds, and customer credits, may subject the company to future regulatory action from the Securities and Exchange Commission and litigation from shareholders seeking damages:

On October 24, 2008, we disclosed certain accounting errors and announced our intent to restate certain of our financial statements and other information to correct these errors (see Note 3 to the consolidated financial statements contained in Part I, Item 1 “Financial Statements (Unaudited) (Restated)”). As a result of these errors, we may become subject to litigation and regulatory action. Although we would vigorously defend against any such actions, there can be no assurance that we would prevail. An award of damages in such suit or a regulatory penalty imposed as a result of regulatory action could be substantial and harm our business. The financial costs and the dedication of the time of management to defend such actions could also harm us financially and disrupt our business. [boldface added]

Sam doesn't take a penny for his good work on this subject, which has made him one of the prime targets of the Overstock smear campaign against its critics.

Overstock is a textbook case of how a politically influential CEO has managed to avoid consequences for his actions. Let's see if the post-Cox SEC will roll over so easily in this and other cases.

© 2008 Gary Weiss. All rights reserved.

Tim Geithner the non-Democrat

I've been reading with great interest talk that the New York Fed chief, Timothy Geithner, might become Treasury secretary under Barack Obama. Here's a Time article on the speculation, saying that "...Geithner, a Democrat, has experience at the Treasury."

That he does. However, the part about him being a Democrat is not correct. He is actually a registered independent, as I pointed out in my Portfolio article.

Not sure that really matters, but it needs to be pointed out, I think.

Obama gave what I thought was a cogent performance at his press conference today (at which Geithner was not present, which also may or may not matter). The media is picking apart his "mutt" and "seance" comments, ignoring that he is still showing tremendous powers of inspiration--which should, one hopes, calm the fears of the markets.

The stock market, nevertheless, went down during the press conference, which also may or may not have any significance. It did rally nicely afterwards.

© 2008 Gary Weiss. All rights reserved.

Does the Stock Market Hate Barack Obama?

Charlie Gasparino was criticized for a New York Post column a few weeks back saying that the market was afraid of Barack Obama's policies. At the time I thought he was wrong, but the market's action lately seems to be confirming that point.

The market today is down 5% so far, and Reuters talks about continued fear of economic slowdown. That's hardly a vote of confidence in the forthcoming Obama administration.

© 2008 Gary Weiss. All rights reserved.

Something to Watch

As the GWB administration draws (chugs, snorts, sighs) to a close, watch for a spate of "midnight regulations" aimed at benefiting Corporate America, PR Watch reports (citing the Denver Post, citing.....).

In the final months of his administration, George W. Bush is working to enact a flurry of new federal regulations that will weaken rules protecting consumers and the environment. The so-called "midnight regulations" aim to relax standards that protect drinking water, loosen controls on global warming pollutants, remove obstacles to ocean fishing and ease restrictions on mountaintop coal mining activities. The new regulations would be difficult to undo, since the law mandates lengthy periods for re-drafting, re-analysis and public comment.

Fun!

© 2008 Gary Weiss. All rights reserved.

Comedy Corner: Towering Incompetence at Overstock.com

The economy is collapsing, the nation is at a crossroads, and at the corporate fraud poster child Overstock.com: well it's mismanagement as usual. Herewith is today's installment of the always comical tale of the third-rate Internet retailer:

Sam Antar and Tracy Coenen report... well, let's go to the videotape:

. . . an interesting inclusion in Overstock.com’s third quarter financials and earnings release.

The company reports:

We believe that, because our current capital expenditures are lower than our depreciation levels, discussing EBITDA at this stage of our business is useful to us and investors because it approximates cash used or cash generated by the operations of the business.

Yet the numbers were this:

Capital expenditures $8,809,000
Depreciation and amortization $5,580,000

As you can see, the capital expenditures are actually higher than depreciation, directly contradicting the verbiage in the 8-K.

The snoring you hear in the background is the SEC's Salt Lake City office, locally known as "Ambien Central." Let's hope whoever is elected president tomorrow actually lives up to his promises (fat chance there) and starts to crack down on corporate malfeasance. A good first start is to light a fire under regulators, beginning with the SEC.

UPDATE: Valleywag weighs in: "Wacky Overstock.com chief presides over massive financial deception." and Overstock.com chief lying about company's finances since 2001.

Hey, you can't buy that kind of publicity.

© 2008 Gary Weiss. All rights reserved.