On the Money: News and Articles
On the Money is the financial column C-level executives just can’t wait to get their hands on. Published by American Cities Business Journals, On the Money is a refreshingly candid (and sometimes humorous) look at the stuff that makes the world go ’round.
Our favorite columns are available in On the Money Journal, a guide to how you can acquire, borrow, protect, move, watch, play with, go to jail for, and have fun with, our most popular commodity – Money!
Conventional wisdom says that family and friends are the first source of financing for a new business.read more
Inject more money into the economic system, and there’s supposed to be growth, liberty and more time to pursue happiness. But it seems that no matter how much money is injected, it’s not enough. A little like, “One dollar is too many, 10,000 not enough.”read more
Most of us are familiar with economic and financial indexes (or indices). We hear daily reports of the change in “The Dow Jones Industrial Average,” or the “Standard and Poor’s 500.” These measurements are designed to provide indications of performance for the group of securities or activities (such as consumer spending) they represent.read more
Many individuals and small businesses borrow money in times of crisis. The old saying, “If you don’t need it, I’ll lend it,” seems particularly true. When we have excess money, usually we’re not thinking of borrowing.read more
The Wall Street Journal recently reported that, “Financial markets began taking seriously the prospect of a downgrade of the U.S.’s triple-A credit rating, which it has held for nearly a century.”read more
There are plenty of predictions made about finance and economics. In fact, a search for “money predictions in 2011” generates more than 28 million hits.read more
On the Money From the April 1, 2011 print edition A recent change in how some over-the-counter (OTC) stocks are quoted caused lots of distress for their investors — who wondered if their stocks had disappeared, stopped trading, been delisted or otherwise had vanished from the trading platforms. The situation started in September 2009, when FINRA (Financial Industry Regulatory Authority), which owns and operates the OTC Bulletin Board, announced it wished to sell it. But FINRA hasn’t been able to sell the OTCBB, and many nervous broker dealers left that exchange starting in January. That’s left many companies with no representation on the OTCBB, resulting in them being pushed down to the less-prestigious Pink Sheets. The OTCBB has been identified with companies that fully report to the Securities and Exchange Commission, and the Pink Sheets with companies that don’t report. Until recently, most small, fully reporting issuers believed they were being listed exclusively on OTCBB, owned by FINRA. However, to their shock, many learned their shares simultaneously were trading on the Pink Sheets, which are owned and controlled by OTC Markets Group Inc. (www.otcmarkets.com). But they also recognized this was a positive development, because they still had a place to trade. Since Jan. 1, more than 850 publicly traded companies moved from being dually quoted (OTCBB and Pink Sheets) to being quoted exclusively on the Pink Sheets. Only 19 issuers remain exclusively quoted on the OTCBB. Adding to the confusion, third-party data providers — such as Yahoo Finance, Reuters and MSNmoney.com — haven’t connected the data between the OTCBB and Pink Sheets. That’s resulted in investors and shareholders not being able to find company listings and trading activity. It’s also left the impression that companies have become noncompliant with the SEC — and many of them have issued press releases to clear that up. The third-party data providers are scrambling to improve their information-gathering systems with both OTCBB and the Pink Sheets. But meanwhile, many companies are listed in a disconnected manner. For example, Yahoo Finance lists Lakewood-based Colorado Goldfields Inc. two ways. The company is listed under the symbol “CGFIA.PK,” its Pink Sheets home, while also appearing under its old Bulletin Board ticker of “CGFIA.OB.” One can still access the current listing at the former symbol — but overall, these dual listings leave the false impression that Colorado Goldfields, which in fact opened in 2004, just started up and has only a few weeks’ worth of trading activity. Some background on the stock market: A blue-chip stock is one with a national reputation for quality, reliability and the ability to operate profitably in good times and bad, according to New York Stock Exchange. The term “blue chip” comes from poker, where chip colors include white, red and blue, with the blues being highest in value. If a white chip is worth $1, a red is usually worth $5 and a blue $10. It follows then that as stocks become more risky, their color goes from blue to red to white. Or, in the case of very risky stocks, it’s a little red mixed with white, creating pink. Hence the term “pink sheet” stocks. To be quoted in the Pink Sheets, companies aren’t required to fulfill any reporting requirements, not even to the Securities and Exchange Commission. In common...read more
It’s hard to go anywhere these days and not hear the word “Facebook,” the social media website that dominates the Internet. Often the discussion is about users’ “privacy settings” and how individual privacy is becoming harder to maintain.read more
On the Money From the December 3, 2011 print edition The FBI raided three large hedge funds in New York, Connecticut and Massachusetts on Nov. 22 as part of a three-year insider-trading investigation. Already, 14 defendants have pleaded guilty. “There’s a lot more patterns and serial insider trading than we previously thought had occurred,” said Scott Friestad, associate director in the Securities and Exchange Commission’s division of enforcement. Authorities say the criminal and civil investigations could surpass the impact on the financial industry of any previous such probes. There may be more arrests, as investigators examine the role of consultants and analysts who provide hedge funds and mutual funds with detailed information about the businesses and industries in which they specialize. To better understand what all this is about, let’s examine what federal law has to say about insider trading. Financial gain often is dependent upon the ability to predict the future. (The back-dating options scandal showed that in the absence of predicting the future, some people will re-invent the past.) It follows, then, that the more knowledge one has about any given scenario, the power to predict will be higher. Knowledge is power. However, sometimes that knowledge is unfair to the public and is a breach of fiduciary duty owed by the person who has the knowledge. Insider trading wasn’t considered illegal at the beginning of the 20th century; in fact, a Supreme Court ruling once called it a “perk” of being an executive. After the excesses of the 1920s, the practice was banned, with serious penalties being imposed on those who engaged in insider trading. To prevent insider trading, the Securities and Exchange Act of 1934 required that when an “insider” (defined as all officers, directors and 10 percent owners) buys the corporation’s stock and sells it within six months, all of the profits must go back to the company. Insider trading becomes illegal when the purchases or sales violate a fiduciary duty or other relationship of trust and confidence. Other violations include “tipping” such information, securities trading by the person receiving the tip and securities trading by those who steal secret information. In other words, trades by insiders in their own company’s stock, which are based upon “material non-public information,” are fraud. The insiders are violating the trust and duty they owe to all shareholders. Corporate insiders have made a contract with all the shareholders to put the shareholders’ interests before their own. When the insider buys or sells based upon special, still-secret information, the contract is desecrated. Insider trading also embraces the “misappropriation theory.” It states that anyone who misappropriates (steals) information from their employer and trades because of that information in any stock (not just the employer’s stock) is guilty of insider trading. Common insider-trading activities scrutinized by the SEC are: Corporate officers, directors and employees who traded the corporation’s securities after learning of significant, confidential corporate developments. Friends, business associates, family members and other “tippers” of such officers, directors and employees. Journalists learning about a takeover in the course of their work. Employees of law, banking, brokerage and printing firms. Government employees who received information because of their job. Persons who stole or misappropriated, and took advantage of, confidential information. And now, those with repeat access to insider information who often function as consultants,...read more
On the Money From the October 1, 2011 print edition The ancient Greek Archimedes said, “Give me a lever that is long enough, give me a fulcrum that is strong enough and give me a place to stand and single-handed, I’ll move the world.” He was describing the physics of “leverage.” Recently, The Wall Street Journal reported that “leveraged debt, part of the credit bubble” was making a comeback. In finance, leverage is borrowed money. To the extent assets are controlled by borrowed money, that’s financial leverage. But furthermore, when the money that’s lent to a consumer also is borrowed, that creates debt upon debt – or leveraged debt. The credit bubble is made up of the multiple lenders that sit between the ultimate lender and ultimate borrower. The term “leveraged buyout” (LBO) frequently is used in connection with acquisitions. Companies buy control of another company (hopefully an asset) using borrowed funds. If the increase in value of the asset is greater than the cost of the borrowed funds, the leverage is positive and the acquiring entity’s return would be amplified. For example, a manufacturing firm is considering purchasing a new machine for $250,000. The new machine will produce a new line of goods that the company believes will generate a profit of $75,000. Without any borrowed money (leverage), the return on the cash purchase will be 30 percent. That is, a $75,000 profit divided by the $250,000 cash investment. However, when the firm’s banker provides a $125,000 loan to finance 50 percent of the investment at an interest rate of 12 percent, the business now can purchase the machine with $125,000 cash and $125,000 debt. The debt will cost $15,000 per annum in interest expense and will reduce the $75,000 profit to $60,000. However, dividing the profit of $60,000 by only $125,000 drives return on cash to 48 percent. (This example ignores the income-tax effect.) Financial leverage is a powerful amplifier. Whatever you’re doing, profitable or not, financial leverage will magnify the result. If the leveraged asset produces less return than the cost of the borrowed funds, the firm’s losses will corkscrew downward at a head-spinning rate. But there’s even more to consider. If the $125,000 that was loaned to the firm by the bank also was borrowed, the bank also is subject to the effects of leverage. On top of that, add two or three more lenders in the chain and you have layered leverage – a very risky position for all participants. In a high-growth economy or industry, leverage generally is a good thing, particularly when the borrowed money is used to finance fixed assets (plant) or real estate, which will produce an unattended cash-flow stream. This was the case in the cable television boom of the late 1970s and early ’80s, and in the housing market when it seemed that real estate values never would fall. Unfortunately, entrepreneurs attempted to repeat this model in the telecommunications industry during the mid-to-late ’90s and in the real estate boom of the mid-2000s. For a variety of reasons, the cash-flow stream didn’t materialize. Therefore, the borrowers who built the plant had highly amplified expense requirements. The result was the telecom implosion of 2000. For the same underlying reason (too much layered leverage), the economic system collapsed in late 2008 as...read more