Thursday, October 28, 2010

ROGER HERTOG - SO MUCH FOR THE BEGINNING...SO MUCH FOR THE END...

It is still important to preserve the truth about the early history of Sanford Bernstein and Company. In a recent interview with Roger Hertog, his version of the birth of Bernstein continues to be different than mine. What prompted him to comment on events that I have never seen mentioned before my website was launched? I don’t think he has ever stated in any interview that Bernstein lost his business partners (with the exception of his brother) within three months of the founding of the company.

The idea that Bernstein came to Roger and “a couple of others with an attractive offer” has no truth whatsoever as far as I’m concerned. While at Oppenheimer I went to Roger Hertog and proposed that we either start a firm or join one. We decided to discuss the possibilities with Bernstein after hearing he was practically out of business. A long protracted negotiation took place over seventy two hours; I was made the second largest shareholder. I brought along a hedge fund client Century Partners, which was the largest account of the firm for many years. At one point we made a clerical error of several hundred thousand dollars in our favor which Century didn’t know about. After long arguments with Bernstein, I persuaded him to return the money. Hertog seems to be in denial and can’t admit he was junior to me in the beginning. He babysat for me, worked as my assistant and then worked under me at Bernstein for over a decade.

It has come to my attention that people when questioned who Osherow was, were told that I left when the company was small. In the article Roger states that the firm had less than $100 million under management in 1980, as if to make the point indirectly again. The fact of the matter is that because of the difference in revenues per dollars of assets at that time, $100 million dollars under management in 1980 would be similar to $1 billion dollars today. Also, the reason we only had $100 million was because when Bernstein was in charge of money management we lost half of our client’s assets in addition to half the clients simply leaving the firm. Just to keep the record straight and to clarify the illusion trying to be created, when I left Bernstein, I immediately joined a well known firm as co-chief investment officer and helped to increase the firm's assets under management from $150 million to $6 billion in a few years.

Within a few years of joining Bernstein, I was appointed head of account management after Bernstein totally failed. I was left alone to produce investment ideas, recreate the entire money management department and keep the firm afloat. More shall come in the future to make this point absolutely clear. It is worth stating that from 1968 to 1980 Lewis Sanders had next to nothing to do with money management decisions, although Sanders has stated “I have a forty year record that is among the best in the industry”. That too will be debated and analyzed in the near future…

Roger finally sounds to me like he agrees with much of my assessment of Bernstein’s personality. Hertog refers to Bernstein hiring a clinical psychiatrist to study the company executives. Roger also refers to the Bernstein eulogy in the interview. I can find no such personality commentary in any interview Mr. Hertog has given prior to my website. Did the reporter find my website and ask for confirmation of these statements?

The reporter describes Roger as smoking a cigar in his Hamptons home. Hertog discusses attending Stuyvesant high school and refers to sex in his dialogue. None of this sounds like Roger to me, it sounds totally like Bernstein. Bernstein thought he was going to be president of the United States and besides his sexual analogies we know Bernstein “smoked a mean cigar”. I wonder what’s going on in Hertog’s mind.

As regards to Hertog and Sanders “anchoring Bernstein’s battleship of a personality” I was the one that lived in a home in Pound Ridge near Bernstein, saw him all the time, commuted to work with him and could relate stories much more malignant that I witnessed but choose not to reveal at this time.

The Hertog article states “Bernstein also took the step of giving all of its clients the same level of service, no matter whether they were $100,000 or $10,000,000 investors". This is in complete contrast to the Bernstein who was quoted in an interview in august 1970 in New York magazine in which Bernstein is quoted as saying “These Idiots! We’re managing their money. They want us to talk to them…”

Immediately after the “Idiots” interview I insisted that Bernstein write a letter to the editor to clarify that our clients were not idiots. The Hertog article states “besides treating clients ethically (and equitably) the company also went to enormous lengths to keep them engaged”. Does that sound like the Bernstein that called our clients idiots? As you can see from Bernstein’s idiots interview I attempted to protect the firm from his explosive and bizarre personality.

According to Hertog article “the firm’s success was more than simply a matter of adjusting to individual styles. It was mainly about the culture that the three men instituted, and the seamless way in which their moral and intellectual values meshed with corporate strategy”. There was no mention of the approximately $600 million dollar settlement paid by AllianceBernstein for illegal fund practices. A December 12, 2003 Washington post article titled “Alliance Struggles to Settle With Regulators; Size of Firm, Weight of Evidence May Make Deal a Model for Other Money Management Firms” was summarized on the Motley Fool’s website as follows:

NY ATTORNEY GENERAL ELIOT SPITZER WANTS ALLIANCE TO ACCEPT A SETTLEMENT: A LARGE FINE, CHANGES IN MANAGEMENT PRACTICES, AND LOWER FEES CHARGED TO MUTUAL FUND INVESTORS. ALLIANCE HAS THE HIGHEST AVERAGE FEE FOR EQUITY FUNDS, 2.09 PERCENT, AND THE SECOND HIGHEST FEE FOR FUNDS OVERALL, 1.63 PERCENT. ALLIANCE HAS SET ASIDE $190M TO COVER FINES, LAWSUITS, AND INVESTOR RESTITUTION. LAST WEEK ALLIANCE TRIED TO SETTLE THE CHARGES. ALLIANCE, THE SEC, AND SPITZER'S OFFICE DECLINED TO COMMENT. SOURCES SAID REGULATORS “WANT MORE HIGH-LEVEL HEADS TO ROLL”.MICHAEL LAUGHLIN, FORMERLY HEAD OF MUTUAL FUND SALES AT ALLIANCE CAPITAL MANAGEMENT LP, SENT AN E-MAIL TO FORMER PRESIDENT JOHN CARIFA AND ROGER HERTOG, CURRENTLY VICE CHAIRMAN OF ALLIANCE'S BOARD, AND OTHER TOP MANAGERS IN JAN 2002 INDICATING THAT ALLIANCE WOULD ALLOW DANIEL CALUGAR, A LAS VEGAS INVESTOR, TO MAKE TRADES IN ITS MUTUAL FUNDS, OF A TYPE THE COMPANY NORMALLY PROHIBITED, IN EXCHANGE FOR PUTTING $51M IN 3 ALLIANCE HEDGE FUNDS. THE E-MAIL SAID CHAIRMAN BRUCE CALVERT IS OKAY WITH THIS.

Moral and ethical decisions? Personality distortions? Performance claims? Legal settlements costing AllianceBernstein public shareholders hundreds of million dollars to settle? Was that the beginning of the end for Alliance and Bernstein’s top managements which finally culminated in abysmal client performance and Sanders abrupt dismissal after Hertog had already left? Let the facts speak for themselves. So much for the beginning, so much for the end.

Saturday, October 23, 2010

SKETCHERS DOES IT AGAIN...(ORIGINALLY PUBLISHED 9/22/10)

Approximately August 1st Robert Greenberg, Chief Executive Officer of Skechers put out glowing statements about how the company was in a very strong position and things were going exceedingly well. Very seldom have I read anything more positive from a Chief Executive Officer.

Since that time the stock of Skechers has crashed from $37 to $22 even though the market has been rising. Robert Greenberg and his executive staff have said absolutely nothing of any significance and have allowed whatever forces at work in the market to cause a decline suggesting that Skechers business must be falling apart.

As an outraged shareholder I demand that this company come clean with the public and make an up to date statement about its business.

If you would like to see what Mr. Greenberg had to say you can refer to the company’s website and read July 28, 2010 press release regarding their earnings outlook. (www.skx.com)

Thursday, October 14, 2010

YOU CAN STAY…AND STILL NOT PAY…

It wasn’t long ago when owning a home was the true meaning of “making it in America”. Having a home, a place of your own, was the ultimate symbol of the benefits of freedom and success. The word “foreclosure” was not commonplace. Florida has the third highest foreclosure rate in the United States, after Nevada and Arizona, with one in every 34 housing units in the foreclosure process or bank owned as of September 1st.

Being in foreclosure is now in vogue. Most people can say they know a friend, family member or acquaintance that has been through foreclosure in past couple of years or is currently in foreclosure. In the past, when someone went through foreclosure, it was generally due to some type of extreme personal circumstance.

Today when one is in foreclosure, the blame is usually never placed upon the homeowner; it’s directed to the lender, the marketplace, the economy, or the politicians, etc. Due to the number of homes being foreclosed upon, the judicial systems have been overwhelmed. The financial institutions have been bombarded with the huge amount of paperwork required to navigate through the foreclosure process. This delay has allowed many people to continue to reside in their homes while the courts and banking systems attempt to reclaim their collateral for the depositors who gave the banks the money to lend out in the first place.

Many people have found that human technical failures have allowed them to take advantage of the system yet again. Similar to the first housing crisis in 2008, these homeowners have realized that there was little the banks could do. It is acceptable, and yes, even trendy, to simply not pay the mortgage and live rent free while the banks and courts attempted to come to a resolution. Some homeowners have even found ways to secure legal assistance in order to delay the inevitable foreclosure of their home. In the meantime, some of these owners decided they could rent out their homes in the foreclosure process and collect rent, while the banks and judicial systems scratch their heads and inch through the paperwork at a snail’s pace.

Now a new glitch has been presented to the mortgage lenders and the court system. With claims of unfair foreclosure proceedings being presented to state officials, a moratorium is being declared which will again slow down the process of completing a foreclosure. The banks and mortgage lenders have been ordered to stop many foreclosure proceedings. Granted, any foreclosure that was completed, illegally, should be examined by the legal system and judged fairly. But to blanket the entire system with a moratorium that could further delay the recovery in the housing sector, could eventually lead to devastating consequences to financial institutions that are already surviving on life support.

This delay will eventually further erode our economic recovery and will spread to many other sectors of the fiscal system. Homeowners who are rightfully facing foreclosure have again been given a “free ride” at the expense of their neighbors, their community, their cities and our country. Why should anyone pay their mortgage if they know the process to collect that debt is riddled with loopholes that allow so many people to simply take advantage of the system. If criminals knew there was only limited consequences for committing a crime, what would that do to the crime rate? That is in effect what has happened in the current foreclosure market in the United States. You can stay, but not pay.

The financial consequences of this current situation could very well escalate into unknown problems for our entire financial system including the notion of banks again facing financial circumstances that might well lead them to the brink of failure. If a bank cannot collect on its loans and is continually facing additional expenses in order to conduct routine business, the results may lead to the wiping out the capital of the banks along with its shareholders and the bondholders, and further cause question for depositors as to the institution’s safety. The government will again have to brought in as the lender of last resort.

Any homeowner with a legitimate complaint should be allowed their day in front of a settlement panel. To stop the foreclosure process completely, which is already backlogged in the court system in many states in excess of six months, will eventually take another toll on the already declining value of homeowner’s properties. When the homes in foreclosures are eventually released back into the market, the overwhelming amount of inventory will most likely force the price of existing homes further downward. Again, the property owners who have been diligent to maintain their financial obligations will be punished for the individuals who wanted a free ride.

Thursday, October 7, 2010

WHY FIRE ONE AND HIRE ANOTHER?

Just read in Barron’s magazine “Vanguard Ousts AllianceBernstein Team”. According to the article Alliance Bernstein has been managing two thirds of the Vanguard U.S. Growth fund since 2001. The article quotes a Morningstar analyst, Katie Rushewicz describing the fund as “Persistently poor performance and management changes mar Vanguard US Growth; this fund has a dismal history”. According to the article the fund has underperformed both its large growth category and the S&P 5000 in the past 5 and 10 year periods.

Coincidentally, in January 2010, Vanguard hired Lew Sanders, who we have written about in prior blogs, and his new firm Sanders Capital, to co-manage the Vanguard Windsor Fund II. This fund also appears to be suffering from a lackluster performance record year to date.

Possibly Vanguard should try to evaluate the possible connection of Mr. Sanders to the lackluster years the Vanguard US Growth fund incurred under his firm’s guidance. Lew Sanders was Chief Investment Officer in charge of Alliance Bernstein investment decisions during what seems to be the majority of AB’s management of the fund. Stay tuned...

Wednesday, October 6, 2010

WHATS THE REAL DEAL MR. BUFFETT?

Now that Warren Buffett has taken it upon himself to become a propagandist for increased taxes for the only moderately wealthy, let’s ask Warren Buffett a couple of indirect questions. He seems to advocate approximately the same tax rate should be applied to people making incremental income above $250,000 per year as those making $10 million a year and above. It’s a bit ridiculous.

Mr. Buffett proudly boasts about his company’s outstanding growth via its book value. I took a real quick look at three insurance companies for the last ten to fifteen years in Value Line; Chubb, Allstate and Berkshire. A perusal seemed to show that those randomly chosen insurance companies had their book value grow in the same manner as Berkshires. No great genius on Mr. Buffett’s part, just an industry trend?

For the sake of discussion, let’s assume Mr. Buffett has a couple of hundred million of his multibillions of net worth invested in municipal bonds. If he gets a tax free return of 2% on his few hundred million in the muni market he would make approximately $4 million dollars on the two hundred million he invested.

Think about it, Buffett would get $4 million dollars of tax free income on such a small percentage of his fortune and he thinks that people who earn a few hundred thousand dollars a year should get an increased tax bill.

I think I read that one of Buffett’s children works at Berkshire Hathaway. I also believe I have read that he has either already given or plans to give each of his children approximately $50 million dollars. When you have the kind of wealth that Buffett has, you can afford to pay the taxes and still leave your children extremely wealthy. People at the lower level of wealth don’t have an equivalent option.

If he wants to opinionate on other people taxes why doesn’t he just give away all of his money instead of putting it into Foundations and taking the tax deduction for doing so. He actually has the gall to say he doesn’t even have a tax accountant.

By the way, from what I can tell, three companies; American Express, Coca Cola and Wells Fargo represent over half of Buffett’s equity investments. Looking at the financial performance of Mr. Buffett’s operating companies as reported in the most recent, confusing, almost 100 page annual report; it appears as if Mr. Buffett’s management skills, in the current economic climate, were not any better than those of his peers.

Since he seems to be a spokesman and model for so many, a public figure rather than a private one, why doesn’t he make a financial disclosure about all of his tax avoidance methods including his foundations, one of which I believe is being run by one of his family members. We would all be enlightened and learn something.

From what I can tell Mr. Buffett has created a public campaign of promoting the so called “working man” so no one really has the incentive to take a good close look at his true intentions and actions in his own life, which seem to me to be to protect himself from close public scrutiny. Increased taxes, to practically the wealthiest man in the world, mean almost nothing, to ordinarily wealthy people, they mean a heck of a lot. He’s just plain wrong. Stay tuned…

Monday, October 4, 2010

TODAYS THOUGHTS

Recently President Obama talked about how he was not a “negative force for Wall Street”. I began to wonder what he really meant by “Wall Street”. Wall Street is just few blocks in New York City.

I thought maybe he was referring to the banks so I took a look at how many people are employed at Citibank, Bank of America and Wells Fargo. I asked five individuals how many people they thought worked at the three combined banks. No one even turned out to be close. The fact is almost one million people work at just these three banks.

Why is it that Wall Street is so often maligned, especially by the political left and especially when it has no meaning? There is an incessant attack on our corporate structure. Corporations are nothing more than a piece of paper. Each politically inspired attack is an arrow aimed directly at the work force.

Until intellectual honesty is brought into political discourse and cliché words are not used to stir up emotions, little progress will be made on the fundamental issues. One of the major problems with the political speeches is the lack of straight forward explanation that fixing the education system, the healthcare system and pretty much everything else requires lots of money. It’s easy enough to make money evil or greedy but those are just cliché words.

We need a system that is legal and moral and praises the people that work within it to create the growth necessary to create a growing standard of living, not a declining one. There is no such thing as bad corporations, there's just bad people. Stay tuned…
 

Shepard Osherow. All Rights Reserved