Barron’s Dec. 15, 2008, issue, published right after Bernard Madoff confessed to conducting a massive Ponzi scheme, noted that a prime victim of the swindle was Fred Wilpon, the New York Mets’ principal owner.
Soon after, on Fox Business News and on New York sports radio station WFAN, I predicted that the scam would force Wilpon and Saul Katz, another chief owner, to sell at least part of the team. (Seven years earlier I had written an article for Barron’s questioning Madoff’s investment claims.) But a team official, interviewed by Fox Business News, said I was “flat-out wrong” and “grossly irresponsible” and that the team wasn’t for sale, in whole or part. As it now turns out, Wilpon & Co. have sold almost half of the team to raise a badly needed $240 million. In part, the Mets’ financial woes reflect the team’s miserable onfield performance and eroding attendance. But it also reflects the pressures wrought by the Madoff scheme and the attempt by Irving Picard, the trustee seeking restitution for victims, to extract a huge payment from Wilpon and Katz, whom he accused of knowingly ignoring the scam, while getting income from Madoff.
Ron Antonelli/Getty Images
With a reduced payroll, the Mets may see attendance continue to decline at Citi Field.
Picard initially sued the Mets co-owners for $1 billion in phony profits he claimed they withdrew over the decades prior to Madoff’s arrest. But a judge this month ruled that the trustee is entitled to only $83.3 million. And Monday, the two sides agreed on a $162 million settlement of all claims—an outcome widely viewed as a win for the embattled owners.
The $162 million represents fictitious profits that Wilpon and Katz and their group withdrew during the last several years they had active accounts with Madoff. At the same time, the Mets officials claim that they lost $178 million in the scheme.
If Picard recovers all of the approximately $20 billion victims apparently lost, he could pay off Madoff investors at 100 cents on the dollar. So far, the trustee has recovered about half of the money lost. That means of the $178 million that the Wilpon accounts lost, about $89 million has already been recovered. So the balance of the total settlement the Wilpon/Katz group would have to give back is around $73 million.
The Mets owners also have benefited in recent weeks by selling 4% shares of the team to 12 investors for $20 million apiece. They’ve reportedly used part of the money to repay a $25 million debt to Major League Baseball and a $40 million loan from Bank of America.
But the bolstered finances probably won’t produce a big payoff on the field. The team, which Wilpon has said is losing $70 million a year, is expected to have a payroll around $90 million this year, down from $142 million in 2011, when it had a 77-85 won-lost record.
— Erin E. Arvedlund
What should we own in this bizarre period of ultra-low interest rates? Probably not Treasury bills and bonds, in part because they have gone up so much in price already. That’s what I wrote for today’s Philly Inquirer:
Currently, we are experiencing an unprecedented time of hyper- low interest rates on U.S. government Treasuries, alongside a historically massive budget deficit. So the Federal Reserve, which sets interest rates for the nation, is stuck: It can’t raise interest rates without increasing the U.S. government’s own interest payment and borrowing burden. But the Fed is de facto “taxing” savers by keeping interest rates low on those of us who hold savings in Treasuries.
Moreover, the Fed has become the biggest buyer of U.S. government debt, amounting to a rigged market. In calendar year 2011, the amount of net debt issued by the Treasury was $1.1 trillion, and the Federal Reserve purchased $730 billion in Treasury bonds.
As a result, smart money investors are starting to trickle out of the Treasury market and into stocks. Coincidentally, what we are witnessing right now is the rally in equities, known as a “melt-up.” A local financial planner explained it to me this way:
“For my clients,” said James Cox, a financial adviser with Devon Financial Partners in Wayne, “we bought Treasuries in January 2011 and sold them in September 2011. We then reallocated to equities in September and October. With a 15 percent correction, many quality companies were on sale. I expect to hold these positions for the next six to 12 months. I am amazed that the market is at the level it is with the 10-year yield until recently under 2 percent. It is my belief that the macro situation does not merit a 2 percent yield.” In other words, the yields should be higher.
Furthermore, “when people rush to exit Treasury positions they bought â ¦ to avoid a capital loss, it causes markets to ‘melt up,’?” Cox explained. (Devon Financial Partners specializes in planning for local business owners, families, and professionals, but is also an agency of the Guardian Life Insurance Co. of America).
For those do-it-yourselfers out there, here are a few options: Do as foreign banks, investment banks, and some big mutual funds are doing and start selling your Treasuries.
T. Rowe Price issued the following to its clients: “With Treasury yields at historically low levels coming into this year, managers say these securities carry significant interest rate risk and caution that longer-term Treasuries may prove most vulnerable to a reversal in performance, especially if the U.S. economy continues to only modestly improve and fears of worst-case scenarios for the euro zone prove unfounded.”
Most expect the yield on the 10-year Treasury bond this year to rise from about 2 percent to possibly 3 percent, which would result in about a 10 percent decline in principal value. “People always ask me if there is a bond bubble, and I say, ‘No, I think there is a Treasury bubble,’?” says Mike Gitlin, the firm’s director of fixed income. “To find real value in longer-term Treasury securities at these recent yield levels, one would have to have an extremely negative view of U.S. growth prospects, which is not our base case.”
Second, if you care to speculate on a potential downward price trend in Treasury bonds, you can do so using exchange-traded funds like ProShares UltraShort 20+ Year Treasury (symbol: TBT). These ETFs allow you to make a wager that Treasury bond prices, which were the best-performing sector last year, will start falling, but they can be quite volatile and risky.
Finally, if you’re a more professional trader familiar with and suited to what could be the borrowing of thinly traded securities, you could also short the Treasury ETF itself, such as Vanguard Extended Duration Treasury ETF (EDV), which holds only long-term Treasuries. PIMCO, Barclays iShares, and Schwab all have similar ETFs..
There are also leveraged ETFs that short the Treasury market for you and amplify your bet with borrowed money: the Direxion Daily 7-10 Year Treasury Bear 1x Shares (TYNS) and Direxion Daily 20 Year Plus Treasury Bear 1x Shares (TYBS), as well as the ProShares Short 7-10 Year Treasury (TBX) and ProShares Short 20+ Year Treasury (TBF).
Some money managers avoid Treasuries altogether. “We just don’t own them,” said Jim Dunn, a Philadelphia native and Villanova grad who is now Chief Investment Officer of Wake Forest’s university endowment fund.
Many thanks to NJ.com for posting a full witness list: One person to look forward to will certainly be Noreen Harrington, the former chief investment officer of Sterling Stamos who wrote in her deposition that she warned both Fred Wilpon and Saul Katz that the return on Bernie Madoff’s investments were strikingly consistent, a warning sign of a possible fraudulent operation.
Here’s the defendants’ (Wilpon, Katz and partners) witness list:
1. Fred Wilpon: The majority owner of the New York Mets
2. Mark Peskin: Chief Financial Officer of the New York Mets and Sterling Equities, a group of companies that includes the New York Mets, Brooklyn Cyclones and other various venture capital groups and real estate partners.
3. Saul Katz: Co-founder and president of Sterling Equities, president of the New York Mets.
4. Arthur Friedman: Senior Vice President of Sterling Equities and a member of the Mets’ board of directors. Due to an illness, Friedman will be testifying via a videotaped deposition.
5. Peter Stamos: Co-Managing Partner and the Chairman and Chief Executive Officer of Sterling Stamos, a private investment firm.
6. Ashok Chachra: A former chief investment strategist and head of absolute return funds for Sterling Stamos.
7. Steve Kenny: A Fleet National Bank executive. Fleet National was a “Madoff Approved” bank, and one that Sterling used to take out “double up” loans that they then used to invest with Madoff.
8. Charles Klein: A managing director at American Securities, a business with a long-standing relationship with Sterling Equities. In 2000, American Securities, also an investor with Madoff, acquired insurance against fraud when investing with Madoff.
9. Robert Rosenthal*: CEO, First Long Island Investors. The trustee has filed a motion with the judge not to allow Rosenthal to testify.
10. Michael Dowling*: North Shore-LIJ Health System president, another person on the list that the trustee has filed a motion against testifying.
11. Sandy Koufax*: A best friend of Wilpon’s from high school. The Hall of Famer was a former teammate of Wilpon’s growing up and visits the Mets’ complex on a regular basis.
12. Robert Morgenthau*: From 1975 to 2009, he was the District Attorney for Manhattan. Currently, he is the chairman of the local Police Athletic League, to which the Wilpon family donated funds that were later mostly seized in the Madoff scandal.
* = The motion filed by Picard states that these witnesses have no relation to the trial issues at hand and are simply the Wilpon’s most famous and philanthropic friends who will attempt to influence a jury.
Here’s the plaintiff’s list:
The bolded names with no description have already been listed above. Based on the list, there are two important things to note here: One is that the trustee’s council will not have Fred Wilpon testify. Saul Katz, however, will. A few more Mets employees are also on this list that weren’t on the defendant’s list, including vice president and controller Leonard Labita, Michael Katz and David Katz.
Lastly, be on the lookout for Harrington, the final person set to testify. As we mentioned up top, she allegedly warned Wilpon and Katz about the suspicious returns from Madoff investments, specifically that they could be the product of a fraudulent operation.
1. Bruce Dubinsky:: Managing director at Duff and Phelps and a retained expert for the trustee’s team.
2. Saul Katz
3. Arthur Friedman
4. Cynthia Rongione
5. Lisa Collura (expert)
6. Matt Greenblatt (expert)
7. Leonard Labita: Vice president and controller, the New York Mets. Accounts caught up in Madoff’s web under the title Sterling Mets Limited Partnership were listed under Labita’s care.
8. Maureen Hawa (via video deposition)
9. Mark Peskin
10. Joseph Reese
11. Michael Katz: Brother of Saul Katz, senior vice president of Sterling Equities and a member of the board of directors for the New York Mets.
12. Steven Kenny
13. Kevin Barcelona: Senior partner and chief financial officer of Sterling Stamos. Received his masters from nearby Seton Hall University.
14. Peter Stamos
15. Basil Stamos: Brother of Peter Stamos and chairman of Sterling Stamos Corporate Philanthropy.
16. Kevin Dunleavy
17. David Katz: Son of Saul Katz, Executive vice president of Sterling Equities and a board member of the New York Mets.
18. Noreen Harrington: the former chief investment officer of Sterling Stamos who wrote in her deposition that she warned both Fred Wilpon and Saul Katz that the return on Bernie Madoff’s investments were strikingly consistent, a warning sign of a possible fraudulent operation.
Normally a ratings agency wouldn’t warrant its own story, except that Egan-Jones was the first to downgrade the U.S. sovereign debt rating last year–way ahead of the Big 3 (the ones who aided and abetted the mortgage debacle? remember them?).
So when Bill Hassiepen of Egan-Jones spoke at the Philly Fed last week, we listened. Another U.S. government rating cut could be in the offing, he said… read on!
Your Money: Local credit-rating firm has different take from the big three
How good are credit ratings these days? Somewhat better than they used to be. That’s because mainstream agencies like Moody’s Investor Service, Standard & Poor’s, and Fitch Ratings, are trying to live down their pasts, in which they underestimated the perils of too much housing and mortgage derivative debt and abetted the financial crisis of 2007-08.
Today, these Big Three agencies’ conflicts of interest are laid bare. They are still paid by bond issuers, but everyone should know that now and realize the firms’ ratings are potentially suspect.
But one homegrown rating agency, Egan-Jones Ratings Co. in Haverford, has beaten this pack with aggressive downgrades of the United States, France, and now Germany.
Egan-Jones has a different business model: its analysts are paid for their research by investors rather than by bond issuers.
Last week, credit rating agencies tussled again at a conference sponsored by the Global Interdependence Center and the Philadelphia Federal Reserve. Egan-Jones senior analyst William Hassiepen noted his firm was the first in July to cut the U.S. government’s sovereign debt rating from AAA to AA+ with an “evolving” outlook.
(Standard & Poor’s downgraded the United States from triple-A in August. Moody’s Investors Service and Fitch both still rate U.S. sovereign debt AAA, a perfect credit).
If Federal Reserve Chairman Ben S. Bernanke were to flood the markets with a third round of liquidity – another bond-buying program known as QE3 for quantitative easing – “that would definitely trigger a review” of the U.S. rating, Hassiepen said. “And the review, I think, would not be favorable,” he told the audience of investors and Fed-watchers at the conference.
Investors should also be wary of European and U.S. banks. “There are issues in banking, particularly American banks, that should scare the daylights out of investors,” Hassiepen said. The problem is the banks’ vast size. The top six U.S. banks hold assets equal to 65 percent of American GDP; the top 3 banks in France hold assets of 240 percent of GDP and Deutsche Bank alone holds assets of 68 percent of German GDP, he said. So a failure could cause repercussions.
What about Germany, which will have to bail out Greece? In January, Egan-Jones cut its rating of Germany to AA- from AA, noting that the country will be stuck paying much of the bill for the European debt crisis.
“And can we have Germany rated higher than the U.S? No,” Hassiepen said. If the United States is downgraded again, Germany almost certainly will be downgraded too, he said. Investors should take heed that prices of those bonds will likely fall again and yields would rise as these nations would be forced to pay higher interest rates for borrowing.
In November, Egan-Jones was also among the first to downgrade the France’s sovereign credit rating, to A from AA-, citing the risk the country’s government would have to bail out its banks.
“It’s increasingly obvious that France is going to have to support its banks,” founder Sean Egan told Bloomberg News at the time. And sovereign ratings often affect countries’ banks.
Egan-Jones on Monday lowered the boom again, downgrading Portugal. That was significant because a lot of mutual funds are not allowed to buy “junk” bonds, and can buy only investment grade. So these ratings matter.
Separately, the Fed’s accommodative monetary policy has hurt consumers, Hassiepen said, noting that spiking gas and food prices were a drag on the U.S. economy. Meanwhile, American wages have not risen.
Additional bond purchases by the Fed falsely understate inflation because they weaken the dollar, Hassiepen said. Most major commodities are priced in dollars, so investors pour money into commodities as the dollar becomes cheaper. And yet, when the Fed looks at inflation, it removes prices of oil, food, and other commodities from the inflation index.
So Hassiepen would avoid Euro bonds unless investors can stomach the high risk. The European Central Bank is copying the Fed’s playbook of buying up government bonds and manipulating prices and interest rates.
Hassiepen said there would be buying opportunities in companies and industries that feed off inflation, such as oil and gas.
Read more: http://www.philly.com/philly/business/personal_finance/20120306_Your_Money__Local_credit-rating_firm_has_different_take_from_the_big_three.html#ixzz1oXqXodc4