SMB Matters Blog:

401k Transparency: Hidden $F#e^e*s%

Originally posted on Fortune Finance: Hedge Funds, Markets, Mergers & Acquisitions, Private Equity, Venture Capital, Wall Street, Washington:

Retirement plan providers have been overcharging investors for decades – creating a huge drag on returns. But new rules on fee disclosure should help drive down costs.

FORTUNE – If you’re a typical 401(k) investor, perhaps you check your account now and then to see how your investments are doing. Or maybe you just let them ride. One thing is almost certain: You don’t know how much you’re paying in management fees. We’re not saying that because it’s human nature. (Though it is.) We’re saying it because until now it’s been almost impossible for a regular person to monitor.

That’s about to change. Thanks to a new rule issued by the Labor Department, later this summer investors will begin receiving reports that for the first time detail all the fees they are being charged by their 401(k) plan providers. Every investor must receive an initial report by Aug. 30. It’s…

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FTIL #11 – Breath of Fresh Air

Many of my friends know that I have somewhat of a green thumb.  One of my prized growth is a simple moon flower that I had purchased as a sapling at a local grocery store that grew into a 3’ cornerstone in my living room with proper care…   Soil, organic compost and Beethoven (not a typo…   Symphony #9 works the best).  Fern, ivy, money tree, you name it – they are all over my condo.  Many of them, aside from adding accent as a décor, also serve as nature’s air purifier.

Below are a few of my favorites –

  • Devil’s Ivy – you can find these at any Home Depot.  Broader leaves are more aesthetically pleasing than it distant cousin, English Ivy.  Known to suck in carbon monoxide, formaldehyde and benzene in the air.
  • Flamingo Flower – again an easy find in many grocery stores.  Nature’s vacuum cleaner for many airborne contaminants such as toluene and xylene emitted from everyday household products.
  • Peace Lilly – doesn’t the name even sound soothing?  Sucks up emissions from household cleaning (and beauty) products and building materials such as acetone, n-hexane and methyl alcohol.
  • Here’s to abreath of fresh air and finer things in life!
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America’s Latest Export: The Shadow Banking System

The Unknown Risks of China’s Trusts, published by Also Sprach Analyst

China Insurance Building (中国保险大厦), Shanghai
China Insurance Building (中国保险大厦), Shanghai (Photo credit: thewamphyri)

 Over the past many months, we have been talking (on and off) about the growing size and risks of the shadow banking in China. The market started to become aware of the risks of the unknown shadow banking system last year when some companies’ bosses started running away from the creditors, particularly in Wenzhou. While the focus has been shifted away from all these underground lending, the problem is not going away.

The so-called “trust” in China is yet another component in the Chinese shadow banking system. The size of the trust industry in terms of assets has reached RMB5 trillion and counting. In the past few years, one of the major sources of funding for trusts has been banks’ depositors. These trusts products offered higher returns than bank deposits (e.g. 10%), thus they appeared to be very attractive, especially when bank deposits have been hugely negative in real term thanks to high inflation, making these trust products a popular destination for bank depositors who want better returns than bank deposits (this has allegedly been one of the causes of the deposit flights, but we would leave the problem for now). Trust companies then take the money raised from banks and invest in stuff that they think can offer high return. The problem is where to invest to generate high return. In a certain sense, this is not very far off from securitisation.

As many real estate companies last year were pushed into desperate situations when the government tightened monetary and credit policy, the real estate industry turned out to be a popular destination for trust companies’ investment as demand for funding from real estate companies meant that these companies were willing to accept high costs of funding. According to this report, real estate accounts for 14.83% of total trust industry’s investment. Both equity and debt investments are common. Of course, these investments can only be fine as long as the real estate market is growing with prices and sales going up, which is not happening.

Moneyweek (via Sina) has a story on one of the major trust companies: China Credit Trust, a trust company with some RMB200 billion of assets. Earlier, this trust company has already been questioned on the investments in real estate sector. As early as 2010, this trust company has invested in a real estate company which ended up being unable to repay the debt. But the real estate market is not the only source of risks for trusts, of course. As in other trust companies, banks helped to distribute the products, thus depositors would invest in the trust products. In the case of this particular trust product by China Credit Trust, it took money from banks’ depositors with interest rates at 9.5-11%. ICBC is the custodian bank.

One of the products raised a total of roughly RMB3 billion, and the money raised is then invested in the equity capital of an energy company in Shanxi, which is a family business. The investment will reach maturity on 31 Jan 2014. However, despite the fact that this was an energy company which produces coal, it turns out that the company was then involved in shadow banking lending itself. In this case, they appeared to have become a loan shark themselves. But they are themselves deeply indebted, and perhaps they have borrowed quite a lot of money from the shadow banking channel as well. Thus in last year, creditors came to demand repayment. Now the bosses of the companies are said to be “under control” by the police, while the debt outstanding amount to RMB5 billion. The company in question might well be insolvent. In any case, this investment is gone.

For those depositors who have bought into this sort of products, the risks are obvious. As the economy slows, the probability that those money cannot be repaid would increase, not to mention that investors in these products have no idea if the one who got funding from their investments are of good credit, or whether these companies are performing fraudulent practices, etc. As far as we understand, banks do not offer guarantee to depositors for these products (although those who bought into these schemes seem to have been led to believe that there is guarantee), thus it will be interesting to see what will happen if more and more problems emerge from the trust sector of the shadow banking system.

And importantly, banks themselves are partnering with trusts to provide lending to companies without being reported in their books as lending. Few months ago the 21st Century Business Herald reported that banks have been using the partnership with trust companies to provide lending to companies. On banks’ books, as a result, they are not described as loans, but probably as equity interest in trusts. As a result of such trickery, these loans are not subject to the same regulation and scrutiny as other loans. The report put the size of such scheme at RMB100 billion, and that’s the figure for the year of 2012 till March.

With the slowing economy being worse than most have expected, and given how China banks decide who to lend to, it should come as no surprise that quite a portion of the outstanding debts through this channel will go bad, while the equity investments through this channel will be wiped off. The size of the industry in terms of assets is roughly at 10% of China’s annual GDP in 2011. Incidentally, the size of subprime mortgage market was estimated at US$1.3 trillion on March 2007, which is, incidentally, more or less at 10% of US annual GDP in 2006. That is not to say that this is subprime for China. Rather, the point is that even though “10% of GDP” does not look large, that could present significant systemic risks thanks to the interconnectedness within the financial system that we may not fully understand yet. So beware of a potential ticking time bomb here that may or may not explode.

For more news and analysis, visit Also sprach Analyst.  Follow us on Twitter and Facebook.

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Let’s All Go to the Lobby

As a consultant, voracious reader, serial networker, author, father of 2, and sometime runner, I am not entirely familiar with the notion of “free time.”  There are times, nonetheless, when I force myself to carve out a few hours, kick back with friends and family and lose myself in a good movie.

Here, in no particular order, are the top 5 titles in my library:

1. The Godfather

Well before his over-the-top “Hoo Ah!” character in Scent of a Woman, Al Pacino played perhaps the most complex, transformative character in all of movie history.  The evolution of Michael Corleone from squeaky clean, Ivy League-educated, decorated war hero to cold, calculating orderer of murders is truly bone-chilling.  The Godfather, along with its phenomenal sequel, is a case study in the elements of a perfect movie: plot twists, gorgeous cinemascapes, impeccable dialogue and delivery, and a powerful soundtrack.  In addition to Michael, the characters are complex and engaging, from the hot-headed Sonny, to dim-witted but dangerous Fredo, to ever-strategizing Tom Hagen.  The movie offers many practical lessons in management, as noted by Fast Company‘s Lydia Dischman.

2. Goodfellas

Next to The Godfather, Goodfellas is arguably the best movie about organized crime, earning a nod from Roger Ebert as “the greatest mob movie of all time.”  All of the usual Martin Scorcese suspects are here, with Robert DeNiro, Joe Pesci, and of course, a steady montage of Rolling Stones tracks.  Ray Liotta‘s gravely narration, coupled with the signature Scorcese classic rock soundtrack, provide the perfect audio complement to the visuals.  It’s a treat to accompany Henry Hill on a roller coaster ride from petty street hood, to high-ranking soldier, to “average nobody,  a schnook.”  Finally, in the bombastic Tommy DeVito, Pesci pulls off what is perhaps the most amazing blend of comedian / psychopath.  He essentially reprises the role a few years later, to less impressive results, in Casino as Nicky Santoro.

3. National Lampoon’s Animal House

John Belushi was arguably the greatest talent ever to come through the ranks of Saturday Night Live, inspiring Chris Farley, Horatio Sanz, and countless other young comedic stars.  The talented cast of Animal House notwithstanding, Belushi steals the show as Bluto with minimal dialogue and nearly 100% physical comedy (aside from the classic “Germans bombed Pearl Harbor” speech).  Animal House is based on the college experiences of writers Dartmouth grad Chris Miller and Washington University alum Harold Ramis.  I felt a personal connection with the film, having attended Wash U a few decades after Ramis.  Of course, the school I attended in the 90′s bore little similarity to the hedonistic playground where Bluto and his friends golfed, dined, and played with horses.

4. National Lampoon’s Vacation

As I’d alluded to in my post on Yahoo! it’s painful to see the descent of once-promising stars.  Anthony Michael Hall is now a bloated caricature of the delightful character he played in Vacation (as is Chevy Chase).  As with Animal House, I feel a personal connection with Vacation and John Hughes’ other movies as they were set in my stomping ground, the northern burbs of Chicago.  I could relate to Rusty as a youth, bellyaching about family trips to “boring” places such as Devon Avenue (Chicago’s “Little India”).  As a husband and father of 2, I now relate more to patriarch Clark Griswold whenever I try to “sell” my kids on trips to boring places such as…Devon Avenue (it’s a 15-minute drive vs 5 hours, but no less painful of a dragging process).  To bridge the gap, every vacation, whether it’s Wisconsin Dells or Washington DC, starts off with a family rendition of “Hey! Ho! Let’s Go” by The Ramones.

5. Office Space

No review needed.  Just seven words: TPS ReportsCase of the MondaysFlair.  <Shudder>.

No Real Plot Twists Here, But…

Movies are a great way to level set reality, especially after an exhausting day at the office or at home.  As with sports, alluding to movies helps to forge common ground in personal, professional, and academic settings: you can tell a lot about a person by the movies they dig.

I encourage you, gentle reader, to watch or re-watch these films next time you’re checking your queue on Netflix or roaming the aisles of the video store (yes, they still exist).  To fans and foes of these films, please reach out and let me know your thoughts.  You can submit comments below, or hit me up at ntorsekar(at)chicagobooth.edu.

And to paraphrase my fellow movie buff Roger Ebert, until next post, the balcony is closed.

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Euro Crisis Warnings

World Bank chief warns Europe risks ‘Lehmans moment’

LONDON (AFP) Sun Jun 17 2012 01:05:06 GMT-0500 (Central Daylight Time)   

Outgoing World Bank president Robert Zoellick warned that Europe was facing a

Win Mcnamee/AFP/Getty Images/File

Outgoing World Bank president Robert Zoellick warned that Europe was facing a “Lehmans moment” and the collapse of the euro currency could trigger a global crisis, in an interview out Sunday.

Zoellick will warn the G20 summit that Europe risks sparking a financial meltdown that would have desperate consequences for developing countries, he told British newspaper The Observer.  “Europe may be able to muddle through but the risk is rising,” the 58-year-old American said. “There could be a Lehmans moment if things are not properly handled.”

The 2008 collapse of US financial services firm Lehman Brothers – one of Wall Street’s most prestigious companies — after its risky bets on the US housing market soured, sparked global financial panic.

Zoellick said developing nations needed to “prepare for the uncertainty coming out of the eurozone and the wider financial markets.

“It will be better if they can avoid piling up short-term debts that can come due in volatile periods and look to the fundamentals of future growth — infrastructure and human capital.”

Zoellick, who steps down at the end of June after five years in charge, said the World Bank was taking action to prevent a credit crunch in southeast Europe and to protect north African states that were exposed to Europe’s debt crisis.

He said the Washington-based institution was focusing on helping emerging economies to protect the most vulnerable if another global financial meltdown occurred.

“Uncertainty in markets is now starting to increase costs for developing countries,” he said.  “The ripple effects are making everybody’s life harder.

“Given the volatility in the world economy, there is a big emphasis on helping developing countries to develop social safety nets that don’t bust the budget.”  Zoellick said Brazil and Mexico had shown the way forward using effective, low-cost targeting, the right mix of incentives plus information technology.

The Group of 20 summit of world leaders is being held in Mexico on Monday and Tuesday.

He said the higher interest rates being paid by Spain and Italy was down to the failure of fellow European countries to give the “right backing”.  Zoellick said he was worried that the lengthy crisis was beginning to lead to demands for economic nationalism.

“This is not just an economic crisis but a political threat as well,” he said.  “We must make sure we keep markets open and beware against creeping protectionism. We are starting to see some increase in the use of trade restrictions.”

This article, World Bank chief warns Europe risks ‘Lehmans moment’, is syndicated from AFP and is reposted here with permission. Copyright 2012 AFP.  All Rights Reserved

Source: AFP (http://s.tt/1eKWj)

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APPetizing: Tidbits #17 – Apps for Foodies

Gotta admit…   I was nowhere near close to being a foodie until I got married.  For me food was means by which we add calories to our bodies so that we don’t fade away.  And the cheaper the fuel, better the outcome…

As I’ve said before, all that changed when I said “I do.”  Now a perfect Friday evening for me is sipping a nicely chilled bottle of Sonoma Cutrer’s Russian River Valley selections with Jenna while mixing up an aesthetically (as well as gastronomically) pleasing bowl of kamut salad with fresh spinach, strawberries, blood orange and, of course, dried kamut.   So when Food and Wine magazine announced their favorite apps for foodies, I had to give their suggestions a try.  Below are my 3 favorites –

  • Intelligentsia Coffee – [Full disclosure, I am addicted to caffeine and I need to give props to this Chicago-based company.]  It’s like having your personal barista – you will always brew up a perfect cup of coffee with this app.
  • WineStein Pro – [Full disclosure, I love wine.]  It’s like having your personal sommelier.  The app provides wine paring suggestions based on ingredients in your dish.
  • Ness – [Full disclosure, I love food.]  It’s like having your personal restaurant concierge.  The app suggests RBC (restaurants, bars, coffee shops) based on your location and food preferences.

PURE JOY!

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Against the Wind – Tidbits #16

Have you ever wondered why planes at times take off and land in a seemingly less efficient direction, e.g. flying from Chicago to Dallas, a typical departure takes off to the northern runway vs. southern and lands in the same trajectory?  Asides from an air traffic controller’s prerogative to better manage the flow of the traffic, the answer is simple (without going into the details of Bernoulli’s Principle or Newton’s Laws) – wind direction.  Since wind flowing over the wing provides the necessary lift to go airborne, headwind during take-off or landing reduces not only the requirement for runway length but also the speed, according to United Airline’s pilot Captain Mike Bowers.  It’s a bit counter-intuitive but he assures, it’s all physics.

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Working Together, Working Better – Part 2

The Google Apps platform helps you and your team work smarter and faster by making it easy for everyone — employees, partners, vendors, anyone — to work together effortlessly across companies, teams and locations. Google Apps allows you to share and edit many types of files (documents, spreadsheetspresentations and more) in real time. Forget about the wasted time and efficiency spent emailing documents back and forth and worrying about the problems of version control. Storing docs in the cloud will mean everyone automatically has the latest version of any file. Doesn’t that just make sense?

You’re able work with your colleagues like you’re in the same room (even if you’re on opposite sides of the world). You will be able to arrange video chats right from your Gmail inbox or jump into the same document and edit it together as if you’re sitting right next to each other at the same computer. With Google Docs, you can share just with a couple of clicks and every member of your team has access to the right versions of any documents, spreadsheets or presentations. Everyone can jump in and make changes at the same time. No need for back-and-forth email attachments or versions that you can’t keep track of. Google Apps also helps you work with your partners, vendors and customers just as you would with your colleagues. You can do things like schedule meetings, share docs, hold video chats and create project sites with people outside your little world, reaching new locations, industries and markets.

So there you have it, Google apps for business helps you communicate in real time across organizations and long distances.

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Tidbits #15 – Happy 75th Birthday Golden Gate Bridge!

Growing up in the East Bay area of Northern California, I cannot remember how many times I’ve crossed the bridges that connect the West and the East Bay.  But my favorite of all time is the iconic Golden Gate Bridge that connects San Francisco with the Sausalito / Tiburon area.  Aside from being a beautiful piece of architecture with its “International Orange” color, it was the first suspension bridge ever built, and a marvel of modern technology at the time.  Given all the elements the Pacific Ocean can punish the bridge with day in and day out, her maintenance crew constantly repaints the bridge from one end to the other – a time consuming process that takes 2 years to complete.  But that’s nothing like what they’re planning to ring in the Golden Gate Bridge’s 75th birthday: Its crew, for the first time ever, is going to clean, reseal and repaint the full lengths of the two main cables, a process that will take 6 years or so to complete…   Here are a few other stats you may find interesting about the GGB:

  • 7,650 feet – length of each of 2 main cables
  • 27,572 – number of steel wires in each cable
  • 250 – number of vertical suspender cables
  • 24,500 tons – total weight of main and suspender cables

“Happy Birthday” indeed to one of our great national treasures!

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Why Does Education Matter?

Some recent research suggests that some cities are behind the curve on employment opportunities.  What is the issue? Is there a valid causation related to education to be found?  It appears that the percentage of residents who have college degrees can forecast the economic success of a locale pretty well.

According to Edward Glaeser, a Harvard economist, metropolitan areas where more than 1/3rd of the population had college degrees (as of 2010) recently had an average unemployment rate of 7.5%, compared with a rate of 10.5% for those areas where less than 1/6th of the population had a college degree1.  The argument is that the latter areas are being left behind in the current economy.

The favored locales include expected economic powerhouses like New YorkBoston, Chicago, and San Francisco, but also hot beds for technology and new startups like Raleigh, Austin, Madison, and the Washington, D.C. area.  Out of favor are older manufacturing centers including Dayton, Youngstown, and Tampa.  A table listing the data for the top 100 metropolitan statistical areas can be viewed here. As you can see from the data spread, the phenomenon is not a Red State/Blue State or North/South issue.

Lessons – if you have a small or young growing company in need of human capital, you have two choices.  If your management team is in place, or you need a long term supply of manual labor, look for those out of favor areas, they will have more of the type of labor that you need.  If you don’t have your brain power in place, or need a workforce heavy with technical skills (engineers, computer science, etc.) head to the in-favor locales, the environment for your high powered skill sets will be better there.  As a bonus, these high percentage areas self-reinforce with a higher quality of life  –  so the long term looks good.  The rich get richer, the not so try to improve slowly or they die off.


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