World News

China

• A study of international scientific output - as defined by the total number of peer-reviewed papers published by scientists in various nations - indicates that China is on course to overtake the US in scientific output by 2013. Over the 12 year period covered by The Royal Society's study, US scientific output increased by 8%. In the same period of time, Chinese scientific output increased by 722%.

Japan

• Traces of plutonium-238, plutonium-239, and plutonium-240 have been found in the soil around the Fukushima nuclear complex. Japan's Nuclear and Industrial Safety Agency has said that the plutonium levels are not harmful to human health, but it could mean that reactor No. 3's containment mechanism has been breached. "Plutonium is a substance that's emitted when the temperature is high, and it's also heavy and so does not leak out easily," said agency deputy director Hidehiko Nishiyama. "So if plutonium has emerged from the reactor, that tells us something about the damage to the fuel. And if it has breached the original containment system, it underlines the gravity and seriousness of this accident." Opposition leaders in the Japanese Parliament are now demanding that the evacuation zone around the plant be widened.

Libya

• In a speech televised last night, US President Obama assured the American people that the United States would not get bogged down in a police action in Libya. "And tonight," the President said in his speech, "I can report that we have stopped Qaddafi's deadly advance." Commentators have observed, however, that he did not actually explain how long the United States would remain involved in the Libyan police action, or outline an exit strategy.
• This morning, Libyan forces pushed the rebels as far east as Bin Jawad.

United States

• Indiana prosecutor Carlos Lam has resigned after acknowledging that he advised Wisconsin Governor Scott Walker to discredit labor union protests by orchestrating a fake assault on himself, possibly with a firearm.
• A man in San Antonio was arrested after a gun battle with police over a price increase in Taco Bell's Beefy Crunch Burritos.

The Iraqi Dinar: Penny Stock, FOREX Style

Apparently, the new hotness for the get-rich-quick schemes on teh intarwebz is investing in the Iraqi Dinar. A representative web site for this may be found at, say, DinarTRADE[1] - which also offers investments in the Korean Won, the Chinese Yuan, the Vietnamese Dong, and an Afghanistan currency they can't even be bothered to name[2]. For what it's worth, DinarTRADE guarantees that the Dinar they sell "are 100% authentic and of non-criminal origin."[4]

So how does investing in Dinar make you richer than Croesus? Here's how DinarTRADE pitches it: "Picture Iraq as a company selling stock. Each Dinar you purchase represents a share in Iraq's bright future. As Iraq recovers from the removal of Saddam Hussein, and starts rebuilding, the country's infrastructure resumes production. Boasting the 3rd largest oil reserves in the world, Iraq's economy can only improve. The Dinar will appreciate in value as the oil driven economy booms." They then show an approximate exchange rate (as of 12/30/2010) showing $1 = 1168 Iraqi Dinars[5], and then show a chart showing how you can get fabulously wealthy if the value of the Dinar leaps upward to $0.01, $0.10, $0.20, $0.50, and $1.00.

They also, in an attempt to assure you that they are legitimate, give you a link to their registration with the US Treasury. All this means is that they have filed the Registration of Money Services Business form (FinCEN Form 107). A money services business is defined by the Financial Crimes Enforcement Network of the United States Department of the Treasury as "any person doing business, whether or not on a regular basis or as an organized business concern, in one or more of the following capacities:

1. Currency dealer or exchanger
2. Check casher
3. Issuer of traveler's checks, money orders or stored value
4. Seller or redeemer of traveler's checks, money orders or stored value
5. Money transmitter
6. US Postal Service"

Notice that it says nothing about acting as a FOREX solicitor. That's because FinCEN form 107 has nothing to do with FOREX trading. All persons and organizations that intend to do business as futures professionals must, under the Commodity Exchange Act, register with the National Futures Association (NFA). If a group - like DinarTRADE - is only citing their completion of FinCEN form 107 while selling you a story about how you will get rich through investment in Dinars, they are vigorously exploiting a loophole. They are not legitimate Retail Foreign Exchange Dealers.

Now, I could continue to make fun of their web sites and their advertising pitches and the fact that they really aren't what they imply through their ad copies[6]. But really. That's like taking candy from a baby. A small baby. One that hasn't learned to walk, yet. Instead, let's review their claims, which boil down to "if the Iraqi Dinar goes up in value, you will be mad bags of money, filthy disgusting rich!"

Technically, this is true. However, using their own $1 to 1168 IQD figure, buying Iraqi Dinars is something like buying a pink sheet stock trading at $0.0008561 per share. Sure, if it goes up, you stand to get rich. If it goes up. If Iraq doesn't dissolve into civil war. If Iraq doesn't begin to experience massive bouts of hyperinflation. If the United States doesn't just pull out, leaving their infrastructure shattered and their nation vulnerable to attack by Iran. Assuming they don't revalue the Dinar, making the old notes worthless.

Their claims also include a second serious flaw: "Picture Iraq as a company selling stock." This is not actually true. Paper money is constantly being printed, in whatever quantities the government needs, for whatever purposes they want. It would be slightly more accurate (well, slightly less inaccurate) to compare Iraq to a mutual fund company, because Iraq stands ready to constantly issue new shares. But not to redeem existing shares. Or to pay dividends. Or do anything else a mutual fund company would do.

In a nutshell, investing in the Iraqi Dinar is not a guaranteed get-rich scheme. At best, it is to FOREX trading what penny stocks are to equity trading. At worst, it is a scam.

[1] "Investing in your future"

[2] Two things here: first, the Afghanistan currency is the afghani. Second, if your foreign currency supplier can't even tell you the name of the currency, think long and hard about how wise it is to buy from them.[3]

[3] Answer: not very. (And yes, I'm aware that I've footnoted a footnote.)

[4] Well. I feel better now.

[5] Oanda, a real FOREX site, shows the Interbank exchange at 1181.530 Dinar to the dollar for 12/30/2010. So that's a 1.15% premium.

[6] Remember, DinarTRADE isn't the focus of this article. It's a representative sample.

Apps, Bills, Bonds, And Justice

Two important bills passed the Senate today. The first, known as the James Zadroga 9/11 health bill, provides 5 years of medical treatment (at a cost of $4.3 billion) for emergency responders with respiratory illnesses caused by inhaled dust from the World Trade Center. The up side is, of course, the simple fact that it's the right thing to do. The down side is that it adds another $860 million or so to the operating costs of the United States each year for the next 5 years, which will only compound everyone's concerns about the US budget deficit (particularly internationally, given the increasing concerns about sovereign debt). The other bill was the ratification of the nuclear arms control treaty with Russia[1], which requires both signatories to reduce their deployed long-range strategic nuclear missiles to no more than 1550, with no more than 700 deployed missile launchers. Peace in our time![2]

New York is in the news. Specifically, behold the new face of fear for Wall Street:

This is Eric Schneiderman, the New York Attorney General-elect. He has just named his deputies - I mean, his legal staff - and is getting ready to take over the civil fraud lawsuit against Ernst & Young.

Apple has dropped the WikiLeaks App[3], on the grounds that it violated Apple's developer guidelines. Apple does not appear particularly concerned about retaliation from Anonymous.

Oh, and last week saw the largest aggregate withdrawals from bond funds in more than two years ($8.62 billion, up from $1.66 billion for the week ending 12/8). Some analysts speculate that most of withdrawals were by instructional investors looking for better yields by directly buying bonds, although concern about interest rates drove some of it.

[1] Just check me on something. This is 2010, right?

[2] Pay no attention to the billions of dollars that will be spent to modernize the nukes that remain.

[3] Protecting banks that make money through the art of wrongful foreclosure? Yeah, there's an app for that.

Face Morphology, Budget Fail, and Repo 105

It's a short trading week going into Christmas, and there's plenty of odd little things happening in the news.

Right off the bat, UBS is in the news. Not for $17.2 billion in losses, or for $50 billion in mortgage writedowns, or for rolling over and releasing depositor information to the IRS (this time), or for the possibility that they will crush the Swiss economy. No, this time it's all about their dress code, and it includes highlights such as:

• "Leave, if possible, your outfit suspended in open air for two days after wearing. The fibers will gain rest and you will prolong the life span of your clothes."
• "At the neck, the shirt must be of sufficient magnitude to leave a space of at least one finger... The neck shirts must exceed approximately about 1 to 1.5 centimeter above the jacked collar..."
• "Don't wear the tie if it's not adapted to the morphology of the face."
• "Hands - do not have false nails and fancy colored nails"
• "Hair - don't have split ends"

Yes. It's nice to know they're focusing on what's important in this era of rising mistrust of financial institutions.

Despite concerns from Friday, North Korea has not felt "any need to retaliate against every despicable provocation", and did not end up reigniting the shooting part of the as-yet unresolved Korean Conflict. South Korean financial markets remain calm but concerned, but the cost of insuring South Korean sovereign debt is up 10%.

The United States still does not have a budget. The Senate is going to try and pass a temporary funding measure to get the government through to March 4, 2011, when it will be someone else's problem.

Ernst & Young LLC are about get sued by the New York State Attorney General's office over the collapse of Lehman Brothers. Why? Because Ernst & Young apparently advised them to use an accounting technique (Repo 105), which allowed them to hide $50 billion in liabilities. How? It would enter into repurchase agreements in which it would take (say) $100 in short term loans for each $105 in bonds it sold. Now, normal repurchase agreements are treated as collateralized short-term loans for accounting purchases (which is what they are). These "repo 105" repurchase agreements, because they're "sold" at a loss, get to be treated as actual sales on the books. So, they would sell under repo 105 just before the end of the quarter, take the "proceeds" of the "sales" to pay down debt, report that their end of quarter balance sheets looked pretty good, and then borrow money a bunch of money to buy the bonds back. It's not illegal, but the New York AG feels it was distinctly fraudulent.

UBS Accused of Aiding in Madoff's Fraud

UBS Accused of Aiding in Madoff's Fraud

Article published on November 29, 2010

UBS is facing a $2 billion lawsuit from the trustee charged with recouping money for Bernard Madoff’s victims, who claims the firm “lent an aura of legitimacy” to Madoff’s Ponzi scheme. So reports the Wall Street Journal.

Irving Picard filed 23 counts of financial fraud and misconduct against UBS and related entities in a New York bankruptcy court on Wednesday, claiming UBS actively participated in the scam. The firm denies any wrongdoing.

The suit was filed in redacted form because UBS has designated as “confidential” information related to its dealings with Madoff. Picard has accused UBS of “trying to shield this information from the public.”

Picard issued a statement saying he intends to file a court application to have the confidential designation removed “and the complaint made public as soon as possible,” Bloomberg reports.

Picard says the bank’s involvement gave legitimacy to several global feeder funds by acting as their sponsor, custodian and administrator. He says UBS sidestepped legal responsibility for the actions of those funds by employing undisclosed indemnity agreements.

Picard claims UBS had inklings that fraud was taking place but still installed Madoff as the sub-custodian of the feeder funds, giving him the power to value the funds, the Journal reports.

David Sheehan, Picard’s counsel, says Madoff's scheme would not have been as successful if UBS had not “agreed not only to look the other way, but also to pretend that they were truly ensuring the existence of assets and trades when in fact they were not and never did.”

UBS on Wednesday called the allegations "completely unfounded and without merit,"

Picard is looking to recover redemptions and fees, as well as damages and disgorgement from UBS, according to Bloomberg.

The lawsuit also names the bank’s UBS (Luxembourg) SA unit and feeder funds including LuxAlpha Sicav and Groupement Financier. LuxAlpha lost 95% of its approximately $1.4 billion in assets and was dissolved four months after Madoff’s arrest in December 2008. LuxAlpha liquidators are also suing UBS and Ernst & Young, the fund’s auditor, for the return of lost assets, Bloomberg reports.

Picard alleges Luxalpha, Groupement Financier and other European feeder funds withdrew more than $1.1 billion from the Madoff funds in the six years before Madoff’s arrest; $796 million was withdrawn in the final 90 days, the New York Times reports.

Meanwhile, bail was set last week at $5 million for Madoff’s former secretary, Annette Bongiorno, who is accused of helping conceal the fraud, the Associated Press reports.

Bongiorno was arrested in Florida earlier this month and is charged with conspiracy and securities fraud. She was released under house arrest after friends and relatives posted her bail, the New York Daily News reports.

Prosecutors claim Bongiorno helped Madoff defraud his wealthy clients for decades. It is also alleged she withdrew more than $14 million for herself.

Bongiorno denies any wrongdoing, the AP reports.

By Kathleen Laverty

To read the New York Times article cited in this story, click here.

To read the Associated Press article cited in this story, click here.

To read the Wall Street Journal article cited in this story, click here if you have a paid subscription.

To read the Bloomberg article cited in this story, click here.

To read the New York Daily News article cited in this story, click here.

(News summaries based on original reports in other publications are prepared by the FundFire staff and are not created, sponsored, approved or endorsed by the publications to which the original reports are attributed.)