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Month: September 2012

The Student Loan Scam (#education, #fraud, @KidDynamiteBlog)

The Student Loan Scam (#education, #fraud, @KidDynamiteBlog)

I saw this story on “What Student Loans Are Really Spent On” at ZeroHedge:

Robert Thomas Price Jr. borrowed about $105,000 for his tuition at Harrisburg Area Community College from 2005 and 2007, federal authorities say. It doesn’t cost anywhere near that much to study at HACC, though.
So Price, 45, of Newport, is facing federal student loan fraud and mail fraud charges.

A U.S. Middle District Court indictment alleges that Price spent much of the loan money on crack cocaine, cars, motorcycles, jewelry, tattoos and video games.

U.S. Attorney Peter J. Smith said today that Price secured about $92,000 in private student loans and around $13,000 in federal PELL grants and Stafford loans. Price was aided in the alleged scam by his ex-wife, a former HACC employee who is not charged or named in the case, Smith said.

Granted, this is anecdotal– one hapless fraud a pattern does not make.

But the fact that it even happened highlights a couple things of import in my mind:

  1. This guy was in his late 30s when he committed this fraud; I bet the average person would be surprised to know what the demographic profile is of the average student loanee, my guess is it is not a starry-eyed, hard-working, bright-but-unresourced 18yo kid just looking to make it in this cold, harsh world
  2. If it happened once, it’s possible it’s happened more than once; how much of the $1T+ in outstanding student loan debt is being spent in frivolous or fraudulent ways? Reminds me of David Einhorn’s book on a SBA loan-backed fraud he shorted and exposed. Fraudsters flock to government handout programs like flies to dung because the government has less of an incentive to catch and punish them given it doesn’t cost them anything but bad press if it takes place, there are always more taxpayers to steal from if fraudsters take a piece of the pie
  3. Student loans are leverage, and they are leverage used to engage in consumption; these kids with student debt don’t suddenly become ascetic monks while they scrupulously work toward their degree and eventually paying off their debt… they continue to live and spend like the college kids they are, just with someone else’s money

To the last point, I chuckled at this response from a friend to whom I sent the ZeroHedge article:

Oh yeah, big time. One of my really good friends that I’ve known since senior year HS, who has never really been a big spender or a big earner, is now a third (or fourth?) year medical student, and he is really living the life of the young adult…through loans. He has a loft in downtown [city withheld], has a HUGE flat-screen tv, bought a new car a couple years ago, and adopted a dog (granted, [name withheld] the dog is super sweet). I seriously doubt he 1) had all that money laying around before, and 2) would spend his own money like that. I’m 99.9% sure it’s all loans because he’s never spent money like this, even when he had a serious gf in college whom he loved and wanted to marry.

I think this article really connects with the last one you sent about vomitus whores. Student loans are essentially enabling all that behavior. Here’s some money, go to “school,” attend some BS classes and write some BS essays, then go drink with this free money. Or perhaps you can go buy a new fancy, shiny thing to show off so that girls will want to sleep with you. *sarcastic thumbs up

I certainly think there is some causation-via-correlation here, though how much exactly is uncertain. Young people are pretty stupid, levered or not. I mean, look at how they vote! What dopes! It’s like they get off on being debt slaves or something.

Anyway, that link in the quote is worth checking out. It’s a riotously funny post from today by Kid Dynamite on the shocking idiocy of the modern American collegiate zeitgeist. Brings new meaning to the term “idiot savant.”

On Living Life Without A Goal (#philosophy)

On Living Life Without A Goal (#philosophy)

A few weeks ago I had lunch over the weekend with an old friend I hadn’t seen in some time. Since our childhood when we had been very close, his life had been characterized by many challenges, upsets and frustrations. In general, he seemed to be living life adrift in a real sense, by his own acknowledgement, the metaphor manifesting itself physically when he literally went sailing around a nearby island on a borrowed sailboat and found himself caught in a strong wind and a nasty current that pushed him off course and left him adrift for several hours, wondering if and how he would make it back to shore.

It has been sad, as his friend, to watch him have such a tumultuous relationship with life. But during this get together, he did communicate that he had been making some positive changes and was coming to a greater self-awareness through practiced effort, at least in terms of what he didn’t want from life.

I am not an expert on life and how to live it, but I endeavor to be to whatever extent it is possible. I learn something new about the art of living daily and I hope this pattern repeats itself for all of my life, however long it happens to be. I share the following not with the attitude of a facetious advice-giver but rather from the standpoint of “Here’s where I am coming from on this issue.”

Knowing what we don’t want out of life or who we are not, is of incredible value. It can save us a lot of time and frustration and wasted energy pursuing dead-ends, so to speak, if we are able to avoid the cul-de-sacs completely and just stay on the main road. But it is not enough to have a negative direction. Velocity implies a positive destination just as much as it carries with it a rate.

I encouraged my friend to think about his life in an ideal way. I asked him to imagine for a second that he had accomplished his dreams, he had gotten what he wanted and no one had stood in his way and the few who had he had stepped over with ease. Then I asked him to describe what that looked like, what it felt like.

The point of the exercise is to develop a positive direction for your life, to imagine some goals you can work toward. (Then the real trick is to enjoy the getting their and not obsess about when, how or if ever you arrive.) I tried to create a metaphor to illustrate the chaos that would come up without living a goal-oriented life.

The best I could do was to ask my friend to imagine watching a person play a game of sport who did not know the rules, who did not respect the boundaries of play and who did not care to score any points. What would such a person look like playing this game?

In one moment, they’d be running toward the goal, in another instant they’d be steaming away from it. For hours at a time they might just sit on the ground and do nothing, making no progress in the game whatsoever, twisting blades of grass in between their fingers or staring at the sky. Sometimes they might work with their teammates to make progress toward the goal. At others they’d fanatically attack them and assist the other team. They might carry the ball out of the boundaries of play, ignoring the deafening scream of the ref’s whistle, only to later carry it back into play.

Now and then they’d score a point, the crowd would go wild but they’d have no idea why, and feel no sense of reward. They’d probably be incredibly confused and often frustrated during the whole ordeal.

This is what living life without a goal is like, in my mind. Choosing a goal is akin to giving your life the structure and rule set of a game, to add coherence to your actions. With a goal you can check yourself and see, “Am I getting nearer or farther?” with each step you take. Further, you have opportunities to practice “playing the game well”. For example, if a person considers themselves to be playing basketball, one can examine their relative skill against a set of ideals common to basketball. If one were to examine someone dribbling, throwing a ball through the air, passing, etc., outside the context of a game of basketball, it’d be nearly impossible to say with any meaning whether they were doing such things with skill or with carelessness.

Living life with a goal is a choice. It offers benefits, as well as responsibilities. It’s not strictly necessary to the idea of “merely surviving” (which, by the way, is a goal itself). But it is enough to make life more interesting and, perhaps, more meaningful.

Are Cash-Flush Corporate Balance Sheets Hiding Stagnating Operating Efficiencies? (#workingcapital, #ZIRP)

Are Cash-Flush Corporate Balance Sheets Hiding Stagnating Operating Efficiencies? (#workingcapital, #ZIRP)

In an article entitled “Too Much of a Good Thing” from CFO.com, we learn that American businesses have become less efficient with their use of working capital over the last year:

Days working capital (DWC) — the number of days it takes to convert working capital into revenue — did decrease marginally in 2011, from 37.7 days to 37 days. But REL downplays the improvement, attributing it in part to the companies’ 13% average revenue growth. “To have a 1.9% decrease is a positive, but not by a lot,” says Prathima Iddamsetty, senior manager of operations, research, and marketing at REL, a working capital consultancy.

Cash on hand across the group of surveyed companies, dubbed the REL U.S. 1,000, increased by $60.3 billion in 2011, helped in part by companies taking advantage of low interest rates to issue more debt, up by a record $233 billion year-over-year. Those companies now have a staggering $910 billion in excess working capital, including $425 billion in inventory, according to REL. “Way too much cash is being left on the table and not being put toward growth objectives,” says Iddamsetty.

But why does it matter?

Indeed, cash is still king for the REL U.S. 1,000. This is clearly evidenced by the $60 billion increase in cash on hand and the $233 billion increase in debt in 2011. Over a three-year period, cash on hand was $277 billion and accumulated debt $268 billion.

But using debt instead of efficient working capital management to get more cash into the bank account “comes with a long-term cost: eventually they will have to pay [the debt] down,” points out Ginsberg. “They’ll also have to generate a return on their existing assets that exceeds the interest rate, which is not what we’re seeing.”

It’s better to tap working capital as a funding source for long-term growth strategies, says Ginsberg. REL Consulting cites top performers in a broad range of industries, leveraging working capital to open up new businesses in emerging markets with growing consumer demand, for instance.

“Top performers have very tight manufacturing timetables and inventory management practices, in addition to strict collections and payment systems that are standardized across all locations,” says Michael K. Rellihan, an associate principal at REL. “The cash they generate from this high level of working capital efficiency is then applied to the growth agenda. Long-term, the result is a powerful benefit to the bottom line.”

“Only process improvements will provide sustainable cash flow benefits,” adds REL’s Sparks. “This requires working more closely with customers, getting better information to suppliers, and improving demand forecasting. You need to have an underlying process in place to manage working capital on a day-to-day basis; if not, it will be difficult to sustain.”

In other words, the growth in corporate debt and the resulting excess cash on the balance sheet gives the illusion of financial and business health in the short-term, when in the long-term these companies still must find ways to improve operating efficiencies and thereby generate profit. Ironically, even as the cost of debt in a zero-interest rate policy environment falls, this is getting harder and harder to do because there are fewer and fewer genuine opportunities to drive real growth and expand the top line while maintaining operating efficiency. It makes you wonder how much of this working capital problem is a symptom of our ZIRP-economy.

There was also a helpful chart showing the state of working capital efficiency by industry that can give you a quick high-level look at winners and losers in terms of working capital management.

Attack Of The Self-Control Snatchers! (#nannystate, #neuropsychology)

Attack Of The Self-Control Snatchers! (#nannystate, #neuropsychology)

Here is the abstract from a neuropsychology research paper entitled “A gradient of childhood self-control predicts health, wealth and public safety“:

Policy-makers are considering large-scale programs aimed at self-control to improve citizens’ health and wealth and reduce crime. Experimental and economic studies suggest such programs could reap benefits. Yet, is self-control important for the health, wealth, and public safety of the population? Following a cohort of 1,000 children from birth to the age of 32 y, we show that childhood self-control predicts physical health, substance dependence, personal finances, and criminal offending outcomes, following a gradient of self-control. Effects of children’s self-control could be disentangled from their intelligence and social class as well as from mistakes they made as adolescents. In another cohort of 500 sibling-pairs, the sibling with lower self-control had poorer outcomes, despite shared family background. Interventions addressing self-control might reduce a panoply of societal costs, save tax-payers money, and promote prosperity.

The progressives are out to improve society once more! And as per usual, it’s to “save tax-payers money”. Of course, first they’re going to SPEND a little tax-payer money, first. But all is well, these kinds of “investments” will more than pay for themselves in time. That’s why the cost of government keeps shrinking and our economy keeps growing and growing!

I guess the case for free will just gets weaker by the day? And since our actions and decisions are so deterministic and imperfect, of course it logically implies that an extra-social institution with a coercive monopoly could improve each and every one of us. The State truly is inevitable. I’m so glad we have government-funded neuropsychology researchers to help us figure this out.

Review – Fooling Some Of The People All Of The Time (#investing, #shortselling, #fraud)

Review – Fooling Some Of The People All Of The Time (#investing, #shortselling, #fraud)

Fooling Some Of The People All Of The Time, A Long Short (And Now Complete) Story, Updated with New Epilogue

by David Einhorn, published 2010

So much could be said about Einhorn’s “Fooling Some Of The People All Of The Time” that I’ll necessarily have to ignore much of it to keep this review to the point. And let me say up front that I believe the main point of Einhorn’s book is that frauds may not be transparent, but the people perpetrating and enabling them often are and on that note I believe it’s clear that Einhorn is the hero and the Allied Capital crowd are the villains. If the opposite be true, Einhorn certainly has me “fooled.”

For what amounts to a legal caper (not a crime caper, a legal caper) involving all kinds of humorless characters, including the liars at Allied Capital attempting to perpetrate a fraud, the duplicitous analysts and journalists seemingly working on their behalf to help cover it up and a menagerie of lawyers, government officials and SEC investigators — can you get any more humorless than that group? — “Fooling” is darned entertaining. Funny, too. I found myself chuckling at the outrageous prevarications of the guilty parties on more than one occasion.

It’s not just a good story, though, it’s something of an instructive modern parable, political, financial and even economic in nature.

Einhorn’s sojourn into the bowels of the Allied Capital fraud began before the current financial crisis but carried into it. Knowing this, it’s both fascinating to see the struggles of someone who had come upon the margins of the crisis before it had become a crisis as well as frustrating to see that the Allied Capital saga is yet another facet of that crisis and one which, despite Einhorn’s having published a whole book about it, has yet to see much coverage in the mainstream press. Three years into what is becoming a growing pile of frauds and wasted resources, many politicians and interest groups are unabashedly calling for the expansion of the Small Business Administration and its various loan programs, rather than the shutting down of a completely compromised institution.

Financially, “Fooling” tells two tales: one is of a bold, dedicated individual (Einhorn) and his small band of loyal followers (Greenlight Capital staff) and friends (private citizens like Jim Brickman) who, despite the odds and the constant doubting of the hoi polloi nevertheless persevered in their struggle for truth and were ultimately vindicated by the facts and their profitable short position; the other is the story of that same man and his merry band who put an ungodly amount of time and resources into investigating a fraud that ultimately represented only about 8% of their portfolio, begging the question, “How much of this was about ego-gratification versus responsibly representing the interests of Greenlight’s partners?”

Knowing that Einhorn and Greenlight continued to make other successful investments along the way, more than once you find yourself wondering if Allied Capital would prove to be some kind of a Pyrrhic Victory. Certainly it’s reasonable to question whether Greenlight wouldn’t have fallen victim to another fraud they had invested in at Tyco if they had spread their attention and energies more equally amongst their various positions.

In the end, it is the economic parable which reigns supreme, however. The Allied Capital case is one of those seeming empirical confirmations of free market economic tenets. One by one, the various watchdogs and regulators prove either useless, incompetent, disinterested or entirely corrupted, from the federal SBA, SEC and even FBI, to the ratings agencies, to the Wall Street establishment analysts to the sacred Fourth Estate itself. It is only Greenlight Capital, and finally the market place at large, motivated by the profit principle, which has any incentive to actually root out and expose the fraudulent financial activities at Allied.

Einhorn’s triumph demonstrates that it isn’t about people but processes, the fundamental and natural incentives of the two competing and mutually exclusive principles of profit versus welfare.

This book is not perfect but it’s enlightening in more ways than one. “Fooling” does an excellent job of revealing the way modern capital markets work and while Einhorn mostly manages to stay above the vulgarity of his opponents, the Allied feud proves that to win a confidence game it’s helpful to have both the truth, and some talented lawyers and public opinion-setters, on your side.

4/5