Smoke And Mirrors
August 15, 2011 11:51 AM   Subscribe

Special Report: The bonds that turned to dust - the extent and impact of corporate secrecy in the United States and beyond. 'After his fund lost investors hundreds of millions of dollars in the credit crunch' Italian economics professor Alberto Micalizzi 'quietly moved most of its assets into bonds in late 2008. These were no ordinary bonds. They were $500 million of highly illiquid paper purportedly issued by a company in a trailer-park suburb of Phoenix' Arizona, 'on behalf of a small Australian commodities firm -- and backed by the proceeds from $10 billion of diesel from the tiny autonomous Russian republic of Bashkortostan.'

'The bonds proved to be impossible to sell, and the professor's Cayman Island-based fund, DD Growth Premium, went into liquidation in the spring of 2009. The fund's implosion left behind a band of irate investors and an enduring riddle as to what exactly happened.

Reuters has followed a paper trail from the fund's offices in the upmarket London neighborhood of Kensington to the dusty American southwest, from the fund's registered home in a Caribbean tax haven to a suburban house in Canberra, Australia.

The story's cast includes an Arizona businessman on the run from U.S. authorities, a Russian allegedly convicted for fraud, and the Italian at the center of it all: a 42-year-old specialist in options pricing who teaches economics at the respected Bocconi University in Milan.'

AMERICAN HAVENS

'What emerges is a cautionary tale from the wilds of offshore finance, a lesson to investors about how easy it is to be drawn into a global maze of paper companies with little substance.

Micalizzi's saga shows how America's role in the global proliferation of anonymous shell companies may enable fictitious assets to be magically transformed into real ones for a time, siphoning money from unwitting investors along the way.'
posted by VikingSword (20 comments total) 13 users marked this as a favorite
 
Micalizzi's biggest blunder was not incorporating his fund here and becoming an American citizen.

If he'd done that, Obama would have bailed him out.
posted by jamjam at 12:02 PM on August 15, 2011 [3 favorites]


Of course, TARP was under Bush Jr.

But your general point stands.
posted by darkstar at 12:05 PM on August 15, 2011 [4 favorites]


Paging Mutant ...
posted by ZenMasterThis at 12:21 PM on August 15, 2011


@jamjam - What are you even talking about? W was the one who created TARP.
posted by ged at 12:21 PM on August 15, 2011




See, the free market always works you dirty fucking hippies.
posted by bardic at 12:38 PM on August 15, 2011 [3 favorites]


I just can't seem to figure out why our economy is on such shaky ground.
posted by Legomancer at 12:39 PM on August 15, 2011


Did anyone else reading this think, "Trailer Parks... now there's a rare growth opportunity in America... without getting involved with Bashkortostan, should I invest in trailer parks?"

It's sad when financial plays around poverty and near-poverty in the world's richest country seem (at least at first glance) like some of the best growth opportunities around.
posted by SeanOfTheHillPeople at 12:51 PM on August 15, 2011 [2 favorites]


tl;dr dumb ass Italian economics professor who has already lost of ton of his clients money gets ripped off one last time by a Russian con man by way of Arizona, Australia and Spain.
posted by Long Way To Go at 1:03 PM on August 15, 2011


@ged: @jamjam is just parroting what Rush, Beck and the rest tell him to think. Not like he's going to let a fact get in the way.

Fascinating article, btw.
posted by kjs3 at 1:12 PM on August 15, 2011


To me, one of the most depressing aspects of this, is how budget cuts have basically rendered regulations and even fraud investigations toothless - is it any wonder that in this new "less regulation" environment, so beloved by our "free market" crony capitalists (of the private profit, public loss ethos), have created a legalized looting economy; of course, the consequences have been playing out the last few years. The relevant passages from the article:

PROBE GOES NOWHERE

In late 2009, under pressure from investors, the UK's Financial Services Authority referred the DDCM case to the Serious Fraud Office, which launched a criminal investigation.

Eight months later the office decided there wasn't enough evidence to prosecute."

"Reuters has found some key parties -- including Zolfo Cooper -- offered to help but were not contacted by the Serious Fraud Office. Reuters presented the office with its findings and offered to discuss the documents it uncovered, but the SFO has so far not taken up this offer.

The SFO, whose resource budget has been cut by 34 percent since 2008-2009, declined to comment for this story."


So, (1) the SFO only finally investigates when there is massive pressure from investors - not very proactive; (2) the SFO can not find enough evidence to proceed, but then (3) refuses help and documentation from both independent sources and from an interested party (4) and it so happens that the SFO had their budget cut by 34% in the key years when this fraud happened.

It reminds me of the Republican efforts to render the SEC toothless for years and years, and then a great surprise that in the massive financial scandals and frauds, the SEC appears only as a paper tiger - a badly drawn paper tiger.

And the efforts to keep weakening regulation are moving apace, completely ignoring the fact that the public has to shoulder trillions of dollars in economic damage from those very same loose regulations and lack of fraud investigations.

Hey, rioters in the U.K., you barbarian thugs, don't you know that you caused by some estimates, almost 350 million pounds in damage? Why, that's almost zero point a brazillion fraction of legitimate - or if illegitimate we don't have the money to pursue fraud - financial rip off artistry by the banksters and their assorted minions? And remember this, rioter thugs - there will always be enough cops to throw your ass in jail, but not as much as a slap on the diamond-studded rolex-wrist for the big boys of finance.
posted by VikingSword at 1:38 PM on August 15, 2011 [10 favorites]


Harry Shearer covered off shore with Bill Black, just yesterday. My usual go to person for understanding the currents and eddies of profit Laundromat Clear Stream has been Lucy Komisar
posted by hortense at 1:47 PM on August 15, 2011


Unwitting investors really need to start witting.
posted by srboisvert at 2:03 PM on August 15, 2011 [6 favorites]


Anonymity: great for shell corporations; evil personified for individuals on the internet.
posted by yesster at 2:20 PM on August 15, 2011 [3 favorites]


Unwitting investors really need to start witting.

They can only start - or continue - be be witting, if the rules permit it, instead of hindering. What if you invest in one kind of instrument, but the rules allow a change of your investment without informing you and you end up with a worthless investment? As long as regulations are as nonexistent, loose, or heavily stacked toward the operators, the only way you can be fully "witting" is to stuff cash/gold into your mattress. Maybe that's the world the free marketers dream of - we certainly are moving in that direction.
posted by VikingSword at 2:22 PM on August 15, 2011 [1 favorite]


the people investing in this instrument knew there were no rules other than the ones agreed to in the paper they signed - which are often extremely vague - intentionally so. Ironically it is often the clients who like this vagueness. Now granted they still got ripped off, but the entity that was supposed to be regulated was the one selling the bonds, not the partnership buying it.

In this sort of investment some of culpability lies at the hands of the LPs/investors who failed at doing their due dilligence.

Unless you have some fetish from getting a k-1 you can pretty easily avoid situations like this by sticking to registered investments.
posted by JPD at 2:40 PM on August 15, 2011 [1 favorite]


Wait - is this about Jennifer Government or the latest Eve Online scam?
posted by symbioid at 3:53 PM on August 15, 2011 [1 favorite]


Here's an interesting discussion of debt that was on CBC's Sunday Edition yesterday. I thought it was relevant because he points out how large corporate debts were manipulated to hide losses during the financial crash.

"Somewhere between 5 and 13 trillion dollars in debts were somehow made to disappear..."


The interview with David Graeber starts at 25:40, but if you start at 21:00 there's some nice swing music.
posted by sneebler at 5:39 PM on August 15, 2011


Try this link to the CBC audio: http://www.cbc.ca/video/news/audioplayer.html?clipid=2090908379
posted by sneebler at 5:41 PM on August 15, 2011


The bonds proved to be impossible to sell

Ah, well, just hold them until maturity, then.

More seriously, I think this is just more evidence of an epidemic failure in risk management and due diligence. Maybe we can regulate our way out of this culture, but I'm not terribly optimistic.
posted by malocchio at 9:02 AM on August 16, 2011


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