Avoiding Loss of What You are Saving; Due Diligence on Domestic and Foreign Investment Advisors and Systems.  How an Asset Protection Lawyer Protects Clients from Theft and Insolvency–The Florida Bar–J. Richard Duke

Nationally Known Asset Protection Planning Speakers Will Address a Florida Bar Sponsored All Day Conference in Ft. Lauderdale, Florida on Friday, May 13, 2011


Written Permission Provided By The Florida Bar for J. Richard Duke to provide to the public.

Avoiding Loss of What You are Saving; Due Diligence on Domestic and Foreign Investment Advisors and Systems.  How an Asset Protection Lawyer Protects Clients from Theft and Insolvency

Richard Duke
Duke Law Firm, P.C.
1572 Montgomery Highway, Suite 205
Birmingham, Alabama 35216-4520
Telephone: 205-823-3900
Facsimile: 205-823-2630
E-mail: richard@assetlaw.com
Web site: http://www.assetlaw.com

2011 Richard Duke, J.D., LL.M. in Taxation, University of Miami School of Law, was named “Top 100 Attorneys” in the U.S., Worth magazine, 2005-2008. He represented the Ludwig von Mises Institute for Austrian Economics (1983-1989). Adjunct Professor of Law, International Tax and Financial Services, Thomas Jefferson School of Law. Contributing author to eight-volume set of books titled International Trust Laws and Analysis, Kluwer Law International; author of U.S. chapter for Global E-Business Law and Taxation (Oxford University Press); co-author of Controlled Foreign Corporation Guide (2007); and co-author of U.S. Tax Reporting Guide for Foreign Trusts, published by Research Press, Inc. (2009).



  1. Trust entered a bear market 1
  2. Hubris of banks. 1
  3. KPMG warned HSBC about Madoff—twice. Audit firm cautioned bank about entrusting $8B in client funds to money manager. 2
  4. Books on the financial system.. 2
  5. Trust and competency. 2
  7. Due diligence with respect to licenses and professional organizations. 3
  8. Performing background checks. 3
  9. Due diligence on the advisor’s investment return history. 3


  1. Determine the first loyalty of the advisor. 3
  2. False claims and sales pitches. 3
  3. Is the advisor pressured by his firm?. 3
  4. Employer; holder of licenses. 3
  5. Who owns the employer?. 4
  6. Proprietary products. 4
  7. Written disclosures for recommendations. 4
  8. Additional compensation. 4
  9. Choosing financial products. 4
  10. Pressure to sell proprietary products. As Jack Waymire states. 4
  11. Who owns the advisory firm?. 4
  12. 17 Paladin Principles. 4
  14. Know the rules and look for red flags, as discussed below.. 5
  15. Skewed risk/return ratios. 6
  16. Too good to be true. 6
  17. Secrecy. 6
  18. Overly consistent 6
  19. Use of complexity to explain investment 6
  20. Vanishing paperwork. 6
  21. Unregistered investments. 6
  22. Delayed payments. 6
  23. Lack of oversight 6
  24. Unregistered advisors. 6
  26. Reliance upon industry regulators. 7
  27. Avoiding the bad advisors in the first place. 7
  28. Identify the potential poor advisors. 7
  29. Weeding out criminals and incompetents. 7
  30. Subjective processes to select advisors. 7
  31. Due Diligence to avoid crooks and incompetents. 7
  32. Avoid subjective process. 7
  33. Use a third party to conduct due diligence. 7
  34. Private investigative firm.. 7
  35. Focus of the research. 7
  36. Ascertaining competence is difficult 7
  37. Experience and education. 8
  38. Use of social media for background checks. 8

A         SEC Chair admits agency’s credibility took a hit 8

  1. SEC focused on rebound in trading volumes in the mid-1970s. 9
  2. SEC and Bernard Madoff. 9
  3. Federal Reserve completely out of touch. 9
  4. Befuddled Alan Greenspan, former Chairman of the Federal Reserve. 10
  5. Cause of price rises. 10
  6. Debauching the currency. 11


  1. Lack of Understanding of Economics. 11
  2. Ignorance of economics. 11
  3. Vigorous intellectual battle. 11
  4. Having a worldview of economics/money/inflation. 11
  5. Determine the meaning of Inflation. 12
  6. Rational Expectations Theory. 12
  7. Efficient Market Hypothesis. 12


  1. Keynesian School 13
  2. Chicago Monetarist School 15
  3. Austrian School 16
  5. Quant turned $100,000 into $220 million fund. 18
  6. Attacks on the Rational Expectations Theory: Efficient Market Hypothesis. 19
  7. Example of direct attack on Efficient Market Hypothesis. 19
  8. How accurate are the predictions of securities analysts?. 19
  9. Prediction of the meltdown of derivatives. 22
  10. Jim Grant predicts the market—June 3, 2005. 23
  11. The quants—math whizzes. 26
  12. The Myth of the Rational Market 27
  13. The Austrians. 27
  14. Can the market be right?. 28
  15. A false assumption—“they must know what they are doing.”. 29
  17. Switzerland—as an example. 29
  18. Personal meeting. 29
  19. Determining background. 29
  20. Personal visit 29
  21. Determine regulatory body of advisor’s firm.. 29
  22. CV and personal references. 29
  23. Information about strategy. 30
  24. Ask to speak with existing clients. 30
  25. Good standing. 30
  26. Professional credentials. 30
  27. Determine professional organizations. 30
  28. Hong Kong and Singapore—as examples. 30
  29. Personal meeting. 30
  30. Determining background. 30
  31. Brand conscious. 30
  32. Word-of-mouth dictates. 30
  33. The “tea party” chat 30

Avoiding Loss of What You are Saving; Due Diligence on Domestic and Foreign Investment Advisors and Systems.  How an Asset Protection Lawyer Protects Clients from Theft and Insolvency

In this paper, the word “advisor” means, as the context requires, either the individual advisor (asset manager) or the firm (bank, asset management firm, etc.).



A.        Trust entered a bear market

As Jim Grant, the well-known author of “The Interest Rate Observer,” stated:

Trust itself entered a bear market in 2008, complementing and perhaps surpassing the selloffs in stocks, mortgages and commodities. Never to be confused with angels, we humans seem to outdo ourselves when money is on the line. So it is that Bernard Madoff, supposed pillar of the community, stands accused of perpetrating one of the greatest hoaxes since John Law discovered the inflationary possibilities of paper money in the early 18th century.

Barely nudging Mr. Madoff out of the top of the news was the Federal Reserve’s announcement [December 16, 2008] that it intends to debase its own paper money. The year just ending has been a time of confusion as much as it has been of loss. But here, at least, was the bright beam of clarity. Specifically, the Fed pledged to print dollars in unlimited volume and to trim its funds rate, if necessary, all the way to zero. Nor would it rest on its laurels even at an interest rate low enough to drive the creditor class back to work. It would, on the contrary, “continue to consider ways of using its balance sheet to further support credit markets and economic activity.”[1]

B.        Hubris of banks

.“I guess, in hindsight, you could say that was a bit of hubris,” admits former Bear banker Tom Casson. By the summer of 2007, Merrill Lynch had $31 billion in leveraged loans sitting on its books that it needed to sell, while Citigroup had another $57 billion—but there were no willing buyers. They were stuck owning securities that they had hoped to be able to sell to yield-hungry investors; now that the music has stopped, they were on the banks’ balance sheets. “We did eat our own cooking, and we choked on it,” John Mack later admitted to FCIC commissioners. One by one, buyout deals—some announced, some still to be negotiated—began to fall apart.[2]

C.        KPMG warned HSBC about Madoff—twice. Audit firm cautioned bank about entrusting $8B in client funds to money manager


KPMG LLP told the London-based bank about the risks in 2006 and 2008 reports. The firm was hired to review how Madoff invested and accounted for the funds, for which HSBC served as custodian. KPMG reported 25 such risks in 2006, and in 2008 found 28, according to copies of the reports.

D.        Books on the financial system

. From this author’s observation, it appears that substantially all of the books on financial matters relating to banks and financial institutions (since the international credit crisis erupted in 2008 from the securitizations of subprime loans) are negative toward banks, bankers and the financial system. The Federal Reserve, its creation of fiat money and credit, and its bailing out of banks (and allowing brokerage firms to become banks) are under attack by Congressman Ron Paul, Jim Grant, Jim Rogers, Peter Schiff, Marc Faber and others.

E.         Trust and competency

. Professionals who are representing these informed investors and are performing due diligence must also stay abreast of economic and monetary matters.


. Some professionals, such as lawyers and accountants, do not want to perform due diligence on behalf of clients with respect to advisors or the asset management systems. For those professionals, it is best to state in writing to clients that they do not perform such services. At the other extreme are lawyers and accountants who may hold securities licenses and may sell mutual funds, securities, bonds, etc., through a separate firm. In the middle are professionals, such as the author of this paper, who perform due diligence for some clients asking for referrals of advisors. However, if a client comes to this author with his selected advisor and is asking for no further recommendation of an advisor, I will not engage in any due diligence on behalf of that client; he must perform his own due diligence. I will provide sources of due diligence to the client but will not participate in checking those sources with him. When I make referrals of advisors, because I receive no direct or indirect remuneration for the referral, I have no conflict of interest regarding the advisor the client chooses. Because I have a “worldview of economics and money,” as discussed below, I only perform due diligence of advisors on behalf of those clients who hold the same or similar worldview, except for background checks.

A.        Due diligence with respect to licenses and professional organizations

. Some professionals prefer only to determine the licenses (such as securities licenses), designations and possibly perform background checks on advisors and professional organizations.

B.        Performing background checks

. Some professionals may want to perform only a background check on behalf of the client with respect to an advisor. The professional may do this through a source such as Google. Some professionals perform this background check through more sophisticated means than Google, as well as the due diligence discussed in the preceding paragraph.

C.        Due diligence on the advisor’s investment return history

. Some professionals may request the historical investment returns, on behalf of the client, with respect to an advisor. The problem here is that if the advisor does not sell products but allocates investments among cash, stock, bond, etc., based on the fact circumstances and goals of each client, obtaining such an historical background may be impractical or impossible. If the advisor is primarily a seller of products, then determining the historical returns will be more available. Some professionals may perform this due diligence in addition to one or both of the due diligence procedures discussed above.


. The following is a summary of the article by Jack Waymire, “Who Controls Your Financial Advisor,” from Worth magazine.[4]

 A.        Determine the first loyalty of the advisor

. Is the advisor’s loyalty primarily to the investor or is it to the advisor’s employer?

B.        False claims and sales pitches

. Allowing sales pitches to persuade instead of looking at the best can cause investors to part with their money.

C.        Is the advisor pressured by his firm?

A question to find an answer to is whether the advisor’s advice is subject to pressure from his employer or the firm that holds his licenses. The following are questions to ask:

1.         Employer; holder of licenses

. What firm employs the advisor or, if an independent contractor, what firm holds the licenses?

2.         Who owns the employer?

Is the firm that employs or licenses the advisor owned by any other companies, such as banks, insurance companies or major Wall Street firms?

3.         Proprietary products

Is the advisor required to sell these firms’ (those listed in questions 1 and 2 above) proprietary products?

4.         Written disclosures for recommendations

. Will the advisor provide full written disclosure for all recommendations that are or may be influenced or controlled by the companies that employ or license him?

5.         Additional compensation

. Does the advisor receive additional compensation or benefits for recommending the products of particular companies?

6.         Choosing financial products

. If the advisor is selected, will the lawyer’s client have the freedom to choose whichever financial products he wants, regardless of who sells them?

D.        Pressure to sell proprietary products. As Jack Waymire states

It costs companies a lot of money to support the sales and service activities of financial advisors. Consequently, the advisors are under a tremendous amount of pressure to sell proprietary products that make the companies the most money, even if the products are inferior to or have higher fees than products produced by third parties.

E.         Who owns the advisory firm?

In deciding whether to allow your client to follow the advice of a financial professional registered with an advisory firm, determine whether the advisory firm is owned by a broker/dealer, which in turn may be owned by a bank.

F.         17 Paladin Principles

. The 17 Paladin principles are included in Jack Waymire’s book, “Who’s Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor”:[5]


  1. You cannot control the volatility of the securities markets, but you can control the quality of your advisor.
  2. Learning to select a quality advisor is easier than learning to invest your own assets.
  3. Do not allow apathy to undermine your financial future.
  4. Spend a small amount of time now so that you save a lot of time later.
  5. Make sure you select advisors for their qualifications and not their personalities.
  6. Utilize an objective, rational process for selecting an advisor that is not affected by emotions or sales skills.
  7. Make sure you have complete information before selecting a professional to be your advisor.
  8. Require all-important advisor information to be in writing.
  9. Permit no exceptions to your due diligence process.
  10. Require full disclosure about all potential conflicts of interest.
  11. Verify integrity by reviewing the advisor’s compliance record.
  12. Verify competence by evaluating education and experience.
  13. You must be the advisor’s only source of compensation.
  14. Quarterly performance reports are a mandatory service.
  15. Ignoring a red flag is hazardous to your financial future.
  16. Minimize the personal relationship with your advisor.
  17. Always interview multiple advisors so you have a choice.



A.        Know the rules and look for red flags, as discussed below

B.        Skewed risk/return ratios

. Low-risk, high-investment returns are a myth, except in rare circumstances.

C.        Too good to be true

. High-rate guaranteed investments, compared with the normal guaranteed rates in the market, are too good to be true.

D.        Secrecy

. It is best not to trust an advisor who asks to keep an investment secret or who boasts of special connections or inside information.

E.         Overly consistent

. It is abnormal for an investment or investments to earn the same rates of return each month due to market volatility.

F.         Use of complexity to explain investment

. Be on the outlook for the use of sophisticated terms or phrases because it is recommended that one pay attention only to a strategy for investments that is not complicated for the advisor to explain.

G.        Vanishing paperwork

. Receipt of a prospectus, offer memorandum or a disclosure statement is necessary.

H.        Unregistered investments

. Investments not registered with the Securities and Exchange Commission (SEC) or state regulators have limited transparency and make it difficult for investors to learn if something is not proper with respect to the investment.

I.          Delayed payments

. If it is difficult to receive payment or cash in an investment (unless you know it cannot be cashed in for a certain period of time), this may indicate problems.

J.          Lack of oversight

. Make sure that checks and balances exist for your protection: held with an independent, third party custodian that is regulated and monitored by regulatory agencies. Do not write checks made payable to the broker but write checks to the third-party broker-dealer or the product company.

K.        Unregistered advisors

. Brokers, investment advisors and their firms are required to be licensed or registered and to make important information public by federal and state securities laws. This information is easily available from the web site of the Financial Industry Regulator Authority (FINRA) to check your advisor’s background, or you may call the BrokerCheck hotline at 1-800-289-9999.


 A.        Reliance upon industry regulators

. A lawyer cannot rely on the SEC, FINRA, state securities commissioners, etc., to shut down bad advisors because they are generally shut down by these agencies after the assets are gone, or substantially gone.

B.        Avoiding the bad advisors in the first place

.1.         Identify the potential poor advisors

. Unlicensed advisors and those with criminal records are red flags.

2.         Weeding out criminals and incompetents

. Avoiding criminals and incompetents is complicated. Mandatory disclosure requirements for advisors’ credentials, ethics and business practices are almost nonexistent. Unethical advisors are skilled at not disclosing bad information and are adept at making themselves appear ethical and competent financial experts.

C.        Subjective processes to select advisors

. Basing a selection on the advisor’s pleasant personality, claims and sales pitches and promises of high returns for low risk benefits scam artists and low-quality advisors. The scam artists know this, which is shown by the victims of Madoff, thinking of him as a friend.

D.        Due Diligence to avoid crooks and incompetents

.1.         Avoid subjective process

. Replace the subjective process of “feelings” toward an advisor with due diligence that confirms the accuracy of information given by the advisor.

2.         Use a third party to conduct due diligence

. A third party, such as an online service, may conduct background checks for as little as $100-$400 or use the free guide available on various web sites, such as: www.Paladinregistry.com

3.         Private investigative firm

. Private investigative firms that have specialists in financial fraud, background checks on financial professionals, etc., provide services to perform background checks on advisors, generally at a reasonable fee.

4.         Focus of the research

. Focus on information relating to ethics and competence of advisors. Web sites such as www.finra.org and www.sec.gov detail investor complaints that resulted in advisors paying restitution to clients, paying fines to regulators or serving industry suspensions.

5.         Ascertaining competence is difficult

. Because most advisors do not provide audited track records, it is difficult to determine competence. Focus on documentation of the advisors’ sources of knowledge, including years of experience, education, certifications, designations and accreditations, such as Certified Financial Planner (CFP), Certified Financial Analyst (CFA),[8] Certified Investment Management Analyst (CIMA),[9] Certified Public Accountant (CPA) and Registered Investment Advisor (RIA).

6.         Experience and education

. Determine the years of actual experience advisors have and determine whether they have college degrees or bought certificates. If advisors include certifications after their names, look up the validity of these certifications and obtain proof that he has the certifications from any valid certifying organizations.

E.         Use of social media for background checks

. Background checks on asset managers can be conducted through social networks and used by attorneys. The New York Law Journal states:

Attorneys have started relying on Internet and social media research to conduct background checks into panelists during voir, and some state courts have recognized the value and necessity of such preliminary screening. [See, e.g., Johnson v. McCullough, 306 S.W.3d 551, 558-559 (Mo. 2010). See generally Brian Grow, Internet vs. Courts: Googling for the Perfect Juror, N.Y. Times, Feb. 17, 2011.] So it is a small logical step to apply these techniques to ferret out or follow-up on allegations of juror misconduct later on.[10]


A         SEC Chair admits agency’s credibility took a hit

Securities and Exchange Commission Chairman Mary Schapiro told a congressional panel Thursday that she hadn’t realized how much the agency’s credibility could be harmed by former general counsel David Becker’s role in handling the Bernard Madoff case.

Members of the House Committee on Oversight and Government Reform took turns grilling Schapiro about the SEC allowing Becker to attempt to recover money for Madoff victims despite his family’s investment of $2 million with the imprisoned swindler.[11]

B.        SEC focused on rebound in trading volumes in the mid-1970s

.When regulators dismantled the fixed commission structure, they weren’t thinking much about the unexpected consequences that might follow. Their focus instead was on the rebound in trading volumes that took place as the bear market of the early and mid-1970s loosened its grip. A pricing system that seemed reasonable when the average daily trading volume in a stock might be a few hundred shares looked like Wall Street getting rich at the investor’s expense when volumes climbed. After all, it didn’t cost a brokerage firm ten times as much to trade a thousand shares as it did to buy or sell a hundred shares of stock, in terms of the salaries paid to staff on the New York Stock Exchange, telecommunications costs, and other forms of overhead.[12]

C.        SEC and Bernard Madoff

It’s hard to think of an excuse for the SEC’s failure to figure out what Bernard Madoff was up to in his massive Ponzi scheme, especially since at least one concerned individual, financial analyst Harry Markopolos, presented an analysis of the whole scheme to them on a silver platter years before Madoff himself confessed. But perhaps there’s an explanation for the agency’s apparent inability to act, one that dates back to the events of 2005 that culminated in the SEC’s decision to fire Gary Aguirre.[13]

D.        Federal Reserve completely out of touch

Authorities had little idea about the massive losses taking place across Wall Street. That Tuesday afternoon, the Federal Reserve said it had decided to leave short-term interest rates along at 5.25 percent. “Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing,” the Fed said in its policy statement. “Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and robust global economy.”

The crisis was mounting, and Washington’s central bankers were completely out of touch. The losses on Monday and Tuesday were among the worst ever seen by quant hedge funds, with billions of dollars evaporating into thin air. Wednesday they got far worse.[14]

E.         Befuddled Alan Greenspan, former Chairman of the Federal Reserve

In congressional testimony in 2000, Vermont representative Bernie Sanders had asked Greenspan, “Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails it will have a horrendous impact on the national and global economy?”

Greenspan didn’t bat an eye. “No, I’m not,” he replied. “I believe that the general growth in large institutions has occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically—I should say fully—hedged.”

Times have changed. Greenspan seemed befuddled by the melt-down, out of touch with the elephantine growth of vast risk-taking apparatus on Wall Street that had taken place under his nose—and by many accounts had been encouraged by his policies.

After his testimony ended, Greenspan stood and walked, hunched over, out of the hot glare of the television lights. He seemed shaken, and it was painfully clear that Greenspan, once hailed as the savior of the financial system after orchestrating the bailout of Long-Term Capital Management in 1998, was a fragile and elderly man whose better days were long behind him.[15]

F.         Cause of price rises

At the Working Group on Financial Markets, July 20, 2006, Congressman Ron Paul asked Federal Reserve Chairman, Ben Bernanke, whether price rises were the monetary phenomenon:

Ben Bernanke: Congressman, I agree with you. Growth doesn’t cause inflation; what causes inflation is monetary conditions or financial conditions that stimulate spending which grows more quickly than the underlying capacity of the economy to produce. Anything that increases the economy to produce, be it greater productivity, greater workforce, other factors that are productive, is only positive. It reduces inflation.[16]

G.        Debauching the currency

. At the same hearing (see above), Ron Paul stated:

Ron Paul: We have a savings rate which is negative. If we had true capitalism, this would be very, very serious because we’d have no savings and no capital to invest. Today, with our monetary system, we resort to other means. We can create credit and money out of thin air and it acts as capital by stealing value from the existing currency. We’ve been doing that for a long time, so the process can continue but it literally is the inflation.

Also, we can resort to borrowing overseas and we are permitted because we have the reserve currency of the world to export our inflation and that seems to be a free ride for us as well. But, how long can we fool the world? How long can we continue with a current account deficit of 6 percent if our productive jobs are going overseas …[17]


A.        Lack of Understanding of Economics

1.         Ignorance of economics

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” Murray N. Rothbard

 2.         Vigorous intellectual battle

“No one can find a safe way out for himself if society is sweeping toward destruction. Therefore, everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result.” Ludwig von Mises

B.        Having a worldview of economics/money/inflation

This author recommends having a solid worldview of economics, economic history, money, monetary history and inflation before performing serious due diligence on advisors. In this paper, the author reveals his worldview. The point is to have a knowledge and understanding of economics, money and inflation so that you can have a worldview before performing due diligence on advisors with respect to how they conduct their asset management.

1.         Determine the meaning of Inflation

It is recommended that a professional come to determine how he defines the word “inflation.” Inflation means either: (a) a general rise in prices, as commonly discussed and stated by the news media, asset managers and market advisors; or (b) the creation of money and credit with a general rise in prices as the consequence. Prior to the early 1920s, inflation was defined as the creation of money and credit out of thin air (modern times: computer entries). It is important to determine whether inflation is a monetary phenomenon, or results from increased production or from a disaster, such as the recent tsunami in Japan, phenomenon causing commodities to rise. To this author, inflation is “an increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices; it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures, as when the supply of goods fails to meet the demand” [if we were under a gold standard].[18] In this author’s view, the consequence of inflation is a general rise in prices; it is not possible to have a general rise in prices without first inflating the money supply, through increased money or credit. Focusing on the consequences of inflation is similar to going to a physician for an infection and he gives you antibiotics to cure that infection; but the infection is caused by a splinter. Remove the splinter and the infection will go away.

2.         Rational Expectations Theory

It is assumed that the outcomes that are being forecast do not systematically differ from market equilibrium results. That is, it assumes that people do not make systematic errors when predicting the future and deviations from perfect foresight are only random. John Muth and Robert Lucas are credited with being the fathers of this theory …[19]

3.         Efficient Market Hypothesis

The efficient market hypothesis is the rational expectations theory of the investment world. Efficient market hypothesis (EMH) asserts that financial markets are informationally efficient, claiming one cannot consistently achieve returns in excess of the average market returns on a risk-adjusted basis. Eugene Fama is credited with being the father of this theory.[20]


 A.        Keynesian School

. The majority of economists in the U.S. are of the Keynesian school. John Maynard Keynes is the economist for which this economic theory is named. Paul Krugman is a lead Keynesian economist today. The following states some of the aspects of Keynesian economics:

A Keynesian believes that aggregate demand is influenced by a host of economic decisions—both public and private—and sometimes behaves erratically. The public decisions include, most prominently, those on monetary and fiscal (i.e., spending and tax) policies …

Nearly all Keynesians and monetarists now believe that both fiscal and monetary policies affect aggregate demand. A few economists, however, believe in debt neutrality—the doctrine that substitutions of government borrowing for taxes have no effects on total demand (more on this below) …

According to Keynesian theory, changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. They often quote Keynes’s famous statement, “In the long run, we are all dead,” to make the point.

Monetary policy can produce real effects on output and employment only if some prices are rigid—if nominal wages (wages in dollars, not in real purchasing power), for example, do not adjust instantly. Otherwise, an injection of new money would change all prices by the same percentage. So Keynesian models generally either assume or try to explain rigid prices or wages. Rationalizing rigid prices is a difficult theoretical problem because, according to standard microeconomic theory, real supplies and demands should not change if all nominal prices rise or fall proportionally.

But Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending—consumption, investment, or government expenditures—cause output to fluctuate. If government spending increases, for example, and all other components of spending remain constant, then output will increase. Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it …

Keynesians believe that prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labor …

Keynesians do not think that the typical level of unemployment is ideal—partly because unemployment is subject to the caprice of aggregate demand, and partly because they believe that prices adjust only gradually …

Keynesians also feel certain that periods of recession or depression are economic maladies, not, as in real business cycle theory, efficient market responses to unattractive opportunities.

 Many, but not all, Keynesians advocate activist stabilization policy to reduce the amplitude of the business cycle, which they rank among the most important of all economic problems. Here, however, even some conservative Keynesians part company by doubting either the efficacy of stabilization policy or the wisdom of attempting it …

Finally, and even less unanimously, some Keynesians are more concerned about combating unemployment than about conquering inflation. They have concluded from the evidence that the costs of low inflation are small. However, there are plenty of anti-inflation Keynesians. Most of the world’s current and past central bankers, for example, merit this title whether they like it or not. Needless to say, views on the relative importance of unemployment and inflation heavily influence the policy advice that economists give and that policymakers accept. Keynesians typically advocate more aggressively expansionist policies than non-Keynesians.

Keynesians’ belief in aggressive government action to stabilize the economy is based on value judgments and on the beliefs that (a) macroeconomic fluctuations significantly reduce economic well-being and (b) the government is knowledgeable and capable enough to improve on the free market.[21]

B.        Chicago Monetarist School

. A large body of economists follow the monetarist school. Milton Freedman, now deceased, is the most well known monetarist economist. The following states some of the aspects of monetarist economics:

Monetarism is a macroeconomic school of thought that emphasizes (1) long-run monetary neutrality, (2) short-run monetary nonneutrality, (3) the distinction between real and nominal interest rates, and (4) the role of monetary aggregates in policy analysis. It is particularly associated with the writings of Milton Friedman, Anna Schwartz, Karl Brunner, and Allan Meltzer, with early contributors outside the United States including David Laidler, Michael Parkin, and Alan Walters …

An economy possesses basic long-run monetary neutrality if an exogenous increase of Z percent in its stock of money would ultimately be followed, after all adjustments have taken place, by a Z percent increase in the general price level, with no effects on real variables (e.g., consumption, output, relative prices of individual commodities). While most economists believe that long-run neutrality is a feature of actual market economies, at least approximately, no other group of macroeconomists emphasizes this proposition as strongly as do monetarists …

Short-run monetary nonneutrality obtains, in an economy with long-run monetary neutrality, if the price adjustments to a change in money take place only gradually, so that there are temporary effects on real output (GDP) and employment …

Continuing with our list, real interest rates are ordinary (“nominal”) interest rates adjusted to take account of expected inflation, as rational, optimizing people would do when they make trade-offs between present and future …

Finally, the original monetarists all emphasized the role of monetary aggregates—such as M1, M2, and the monetary base—in monetary policy analysis, but details differed between Friedman and Schwartz, on the one hand, and Brunner and Meltzer, on the other. Friedman’s striking and famous recommendation was that, irrespective of current macroeconomic conditions, the stock of money should be made to grow “month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent, whereX is some number between 3 and 5.”2 Brunner and Meltzer also favored monetary policy rules but recognized the attractiveness of activist rules that relate money growth rates to prevailing economic conditions. Also, they typically concentrated on the monetary base, adjusted to reflect changes in reserve requirements, whereas Friedman was more concerned with M2 or M1 and, indeed, sought major changes in banking legislation, such as 100 percent reserve requirements on deposits, designed to make the chosen aggregate precisely controllable.

Friedman’s constant-money-growth rule, rather than other equally fundamental aspects of monetarism, attracted the most attention, thereby detracting from the understanding and appreciation of monetarism. In particular, this led to the comparative neglect of Friedman’s crucial “accelerationist” or “natural-rate” hypothesis, according to which there is no long-run trade-off between inflation and unemployment; that is, the long-run Phillips Curve is vertical. The no-trade-off view was also promoted by Brunner and Meltzer. Accordingly, it might be argued that the two fundamental monetarist propositions are (1) that cyclical movements in nominal income are primarily attributable to movements in the stock of money, and, (2) that there is no permanent trade-off between unemployment and inflation. Together, these lead to monetarist style policy positions.

[22]C.        Austrian School

. The minority of economists and professors at colleges and universities are followers of the Austrian school. Ludwig von Mises and Friedrich von Hayek, both deceased, are the most well known Austrian economists. The Austrian school studies “human action” and the following states some of the aspects of Austrian economics:

[The Austrian School] is not a field within economics, but an alternative way of looking at the entire science. Whereas other schools rely primarily on idealized mathematical models of the economy, and suggest ways the government can make the world conform, Austrian theory is more realistic and thus more socially scientific.

Austrians view economics as a tool for understanding how people both cooperate and compete in the process of meeting needs, allocating resources, and discovering ways of building a prosperous social order. Austrians view entrepreneurship as a critical force in economic development, private property as essential to an efficient use of resources, and government intervention in the market process as always and everywhere destructive …

The concepts of scarcity and choice lie at the heart of Austrian economics. Man is constantly faced with a wide array of choices. Every action implies forgone alternatives or costs. And every action, by definition, is designed to improve the actor’s lot from his point of view. Moreover, every actor in the economy has a different set of values and preferences, different needs and desires, and different time schedules for the goals he intends to reach.

The needs, tastes, desires, and time schedules of different people cannot be added to or subtracted from other people’s. It is not possible to collapse tastes or time schedules onto one curve and call it consumer preference. Why? Because economic value is subjective to the individual.

Similarly, it is not possible to collapse the complexity of market arrangements into enormous aggregates. We cannot, for example, say the economy’s capital stock is one big blob summarized by the letter K and put that into an equation and expect it to yield useful information. The capital stock is heterogeneous. Some capital may be intended to create goods for sale tomorrow and others for sale in ten years. The time schedules for capital use are as varied as the capital stock itself. Austrian theory sees competition as a process of discovering new and better ways to organize resources, one that is fraught with errors but that is constantly being improved.

This way of looking at the market is markedly different from every other school of thought. Since Keynes, economists have developed the habit of constructing parallel universes having nothing to do with the real world. In these universes, capital is homogeneous and competition is a static end state. There are the right number of sellers, prices reflect the costs of production, and there are no excess profits. Economic welfare is determined by adding up the utilities of all individuals in society. The passing of time is rarely accounted for, except in changing from one static state to another. Varying time schedules of producers and consumers are simply nonexistent. Instead we have aggregates that give us precious little information at all …

Mainstream economists hold that the government must control monetary policy and the structure of banking through cartels, deposit insurance, and a flexible fiat currency. Austrians reject this entire paradigm, and argue that all are better controlled through private markets. In fact, to the extent that today we have serious and radical proposals for having the market play a greater role in banking and monetary policy, it is due to the Austrian School …

The theory argues that central-bank efforts to lower interest rates below their natural level causes borrowers in the capital goods industry to overinvest in their projects. A lower interest rate is normally a signal that consumers’ savings are available to back up new production. That is, if a producer borrows to build a new building, there is enough savings for consumers to buy the goods and services that will be made in the building. Projects undertaken can be sustained. But artificially lowered interest rates lead businesses into undertaking unnecessary projects. This creates an artificial boom followed by a bust once it is clear that savings weren’t high enough to justify the degree of expansion.[23]


A.        Quant turned $100,000 into $220 million fund

Before providing information regarding the questioning and frequent attacks on mainstream advice and research, as a result of the international credit crisis, we must look at one (and this is not to say it is the only one) glaring exception where a quant turned $100,000 into $200 million. The SEC allowed this to be reported so it appears to be legitimate.

In a rare exception, the Securities and Exchange Commission allowed Mr. Auer to include the 20-year audited performance history from 1987 through 2007 in the mutual fund’s prospectus.

According to the prospectus, the strategy had just three negative years and underperformed the S&P 500 on a full-year basis five times.[24]

This quant will disagree with the author’s view of not believing in the Rational Expectations Theory and the Efficient Market Hypothesis. The point is that you must determine whether you prefer advisors who follow the mathematical methods of determining the market (such as quants) through the Efficient Market Hypothesis or whether you prefer advisors who look at “human action” as expounded by the Austrian School.

B.        Attacks on the Rational Expectations Theory: Efficient Market Hypothesis

The primary attacks, coming from many books and publications, against the mainstream relate to exposing the apparent fallacies of the Rational Expectations Theory and the Efficient Market Hypothesis.

1.         Example of direct attack on Efficient Market Hypothesis

William Bonner and Addison Wiggin state, in their book:

The efficient market hypothesis, first put forward by Eugene Fama in the 1960s, was another of those fabulous theories worthy of Marx or Freud—profound and totally absurd at the same time.[25]

 C.        How accurate are the predictions of securities analysts?

 The following discussion from the book, The Black Swan—The Impact of the Highly Improbable, shows scientific studies with respect to how well securities analysts have fared with their predictions:

Herding Like Cattle

 A few researchers have examined the work and attitude of security analysts, with amazing results, particularly when one considers the epistemic arrogance of these operators. In a study comparing them with weather forecasters, Tadeusz Tyszka and Piotr Zielonka document that the analysts are worse at predicting, while having a greater faith in their own skills. Somehow, the analysts’ self-evaluation did not decrease their error margin after their failures to forecast.

Last June I bemoaned the dearth of such published studies to Jean-Philippe Bouchaud [from Paris] … who apply methods of statistical physics to economic variable, a field that was started by Benoît Mandelbrot in the late 1950s. This community does not use Mediocristan [see below for definition] mathematics, so they seem to care about the truth. They are completely outside the economics and business-school finance establishment … Unlike economists who wear suits and spin theories, they use empirical methods to observe the data and do not use the bell curve.

[Mediocristan is a mythical land inhabited by economists (and other social scientists) who believe that the world’s events fit neatly beneath a bell curve of outcomes. Economists live in this land not because they are mediocre–in fact, they are decidedly less than mediocre in their prognostications–but because they accept one very crucial idea. They believe that extreme outcomes such as market crashes and other major discontinuities in our economic life are so rare that we can all but ignore them.]

He surprised me with a research paper that … scrutinized two thousand predictions by security analysts. What it showed was that these brokerage-house analysts predicted nothing—a naïve forecast made by someone who takes the figures from one period as predictor of the next would not do markedly worse. Yet analysts are informed about companies’ orders, forthcoming contracts, and planned expenditures, so this advanced knowledge should help them do considerably better than a naïve forecaster looking at the past data without further information … But to understand how they manage to stay in business, and why they don’t develop severe nervous breakdowns (with weight loss, erratic behavior, or acute alcoholism), we must look at the work of the psychologist Philip Tetlock.

I Was “Almost” Right

 Tetlock studied the business of political and economic “experts.” He asked various specialists to judge the likelihood of a number of political, economic, and military events occurring within a specified time frame (about five years ahead). The outcomes represented a total number of around twenty-seven thousand predictions, involving close to three hundred specialists … The study revealed that experts’ error rates were clearly many times what they had estimated. His study exposed an expert problem: there was no difference in results whether one had a PhD or an undergraduate degree. Well-published professors had no advantage over journalists. The only regularity Tetlock found was the negative effect of reputation on prediction: those who had a big reputation were worse predictors than those who had none.

But Tetlock’s focus was not so much to show the real competence of experts (although the study was quite convincing with respect to that) as to investigate why the experts did not realize that they were not so good at their own business, in other words, how they spun their stories. There seemed to be a logic to such incompetence, mostly in the form of belief defense, or the protection of self-esteem.

Get Another Job

 The two typical replies I face when I question forecasters’ business are: “What should he do? Do you have a better way for us to predict?” and “If you’re so smart, show me your own prediction.” In fact, the latter question, usually boastfully presented, aims to show the superiority of the practitioner and “doer” over the philosopher, and mostly comes from people who do not know that I was a trader. If there is one advantage of having been in the daily practice of uncertainty, it is that one does not have to take any crap from bureaucrats.

One of my clients asked for my predictions. When I told him I had none, he was offended and decided to dispense with my services. There is in fact a routine, unintrospective habit of making businesses answer questionnaires and fill out paragraphs showing their “outlooks.” I have never had an outlook and have never made professional predictions—but at least I know that I cannot forecast and a small number of people (those I care about) take that as an asset.

There are those people who produce forecasts uncritically. When asked why they forecast, they answer, “Well, that’s what we’re paid to do here.”

My suggestion: get another job.

This suggestion is not too demanding: unless you are a slave, I assume you have some amount of control over your job selection. Otherwise this becomes a problem of ethics, and a grave one at that. People who are trapped in their jobs who forecast simply because “that’s my job,” knowing pretty well that their forecast is ineffectual, are not what I would call ethical. What they do is no different from repeating lies simply because “it’s my job.”

Anyone who causes harm by forecasting should be treated as either a fool or a liar. Some forecasters cause more damage to society than criminals. Please, don’t drive a school bus blindfolded.[26]

D.        Prediction of the meltdown of derivatives

Peter Bernstein predicted the meltdown of derivatives in his book, Against the Gods, published in 1996:

Derivatives are the most sophisticated of financial instruments, the most intricate, the most arcane, even the most risky. Very 1990s, and to many people a dirty word.

Here is what Time magazine had to say in an April 1994 cover story:

[T]his fantastic system of side bets is not based on old-fashioned human hunches but on calculations designed and monitored by computer wizards using abstruse mathematical formulas … developed by so-called quants, short for quantitative analysts.

We have just looked at the fantastic system of side bets based on old-fashioned human hunches. Now we turn to the fantastic system concocted by the quants.

Despite the mystery that has grown up about these instruments in recent years, there is nothing particularly modern about them. Derivatives go back so far in time that they have no identifiable investors: no Cardano, Bernoulli, Graunt, or Gauss. The use of derivatives arose from the need to reduce uncertainty, and surely there is nothing new about that.

Derivatives are financial instruments that have no value of their own. That may sound weird, but it is the secret of what they are all about. They are called derivatives because they derive their value from the value of some other asset, which is precisely why they serve so well to hedge the risk of unexpected price fluctuations. They hedge the risk in owning things like bushels of wheat, French francs, government bonds, and common stocks—in short any asset whose price is volatile.

Frank Knight once remarked, ‘Every act of production is a speculation in the relative value of money and the good produced.’ Derivatives cannot reduce the risks that go with owning volatile assets but they can determine who takes on the speculation and who avoids it.

Today’s derivatives differ from their predecessors only in certain respects: they are valued mathematically instead of by seat-of-the-pants methods, the risks they are asked to respond to are more complex, they are designed and managed by computers, and they are put to novel purposes. None of these features is the root cause of the dramatic growth in the use of derivatives or the headlines they have grabbed.

Derivatives have value only in an environment of volatility; their proliferation is a commentary on our times. Over the past twenty years or so, volatility and uncertainty have emerged in areas long characterized by stability. Until the early 1970s, exchange rates were legally fixed, the price of oil varied over a narrow range, and the overall price level rose by not more than 3% or 4% a year. The abrupt appearance of new risks in areas so long considered stable has triggered a search for novel and more effective tools of risk management. Derivatives are symptomatic of the state of the economy and of the financial markets, not the cause of the volatility that is the focus of so much concern.[27]

E.         Jim Grant predicts the market—June 3, 2005

“We don’t perceive that there is a national bubble,’ Alan Greenspan, speaking about house prices, advised the Economic Club of New York the other day, ‘but it’s hard not to see … that there are a lot of local bubbles.’ For what might be the first time in his life, the Maestro thereby staked out a genuinely contrary investment position. These days, bearishness on house prices has become an Approved Institutional Opinion, much like bullishness on almost everything else …

The … view, and ours, is that, in residential real estate from Miami to Seattle, ‘bubble’ is the word.

… A bubble market, is one that goes way, way up, then comes way, way down. And house prices have gone way, way up—in April, he median existing home price showed a year-over-year gain of 15%. But they have not come way, way down. Indeed, the national average has not registered a broad-based decline in living memory. Since the 1930s, sideways is as bad as a bear market in American residential real estate has gotten (though there have been some ferocious localized declines). ‘[H]istory is definitive,’ pronounced the American Banker in a May 23 article on interest-only mortgages, ‘The national average price of a home may remain relatively flat for a number of years, but it doesn’t’ fall.’ Let’s see about that.

If the 2005 U.S. residential real estate market were in a bubble, and if prices did not subsequently fall, that would constitute a first. A bubble is a defined phenomenon; not just any frothy market makes the grade. According to the analysts at BMO, Boston, a bubble is a two standard deviation event, and they have identified only 28 of them since the Coolidge bull stock market.

Physicists rightfully smile at the pretensions of Wall Street’s quants. But, in the matter of bubbles, the financial analysts may have discovered an actual law of nature. In 27 of the 28 cases, according to GMO, sky-high prices eventually returned to earth, frequently making a small crater as they landed …

We base our affirmative reply on many things, including the proliferation of no-money-down and interest–only mortgages; the soaring growth in the volume of new houses for sale, which houses do not yet happen to exist; and the growing imbalance between rising supply and sated demand …

Which brings us to the centerpiece of the investment case against houses. R. King Burch, the originator of the forthcoming analysis, is a paid-up subscriber [to the Interest Rate Observer] in Honolulu … Today, he consults and invests for himself in Hawaii. Either house prices are in a bubble, Burch advises, or, if not that, ‘at least something very different from the usual home guying activity that goes on in the U.S. economy.’

We believe that Burch has proven the bubble case, with all it implies for a future slump in the prices of the roofs over our heads. Like many another eureka, this one is calculated to make the reader say; ‘Now why didn’t I think of that?’ …

What has driven the boom is rather the accessibility of dollars. For this monetary superabundance, the revolution on securitized mortgage finance, specifically the post-2000 lift-off in MBS [mortgage-baked security] activity, deserves thanks. Comments Burch: ‘The relatively recent advent and growth of an international market in mortgage-backed securities, whose buyers are neither especially knowledgeable of, nor concerned with, the credit and collateral of the borrower trumps the claims, valid in quaint earlier times when a neighborhood lender made and held local loans, that real estate markets are local.’ And while you’re at it, thank the so-called carry trade (the tactic of borrowing at a low rate and investing at a higher, longer-term rate) and the shape of the yield curve (short rates conveniently below longer ones).

In times past, the homebuyer had to apply for a loan. Now, the lenders almost apply to him, whoever he is. Can you fog a mirror?

But wait, Burch cautions. A subprime-grade borrower availing himself of a no-money-down, interest-only mortgage confronts daunting arithmetic …

“Home prices and financing cannot continuously diverge from the buyer’s ability to pay,” Burch winds up. “Even the most aggressive MBS investors must eventually balk at funding towering home prices when the buyer has no ‘skin’ in the game. Since mortgage rates have, generally, stopped declining, I would bet (in fact, I have bet, by purchasing put options on home builders) that the game has already peaked …”[28]

F.         The quants—math whizzes

. From the book, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed it:

Now investors were acting far more stupidly and self-destructively than he could possibly have imagined.

“I thought you made money because people make mistakes,” his wife chided him. “But when the mistakes are too big, your strategy doesn’t work. You want this Goldilocks story of just the right irrationality.”

Asness realized she was right. His Chicago School training about efficient markets had blinded him to the wilder side of human behavior. It was a lesson he’d remember in the future: People could act far more irrationally than he’d realized and he had better be ready for it. Of course, it’s impossible to prepare for every kind of irrationality, and it’s always the kinds you don’t see coming that gets you in the end …

Like crack cocaine, it was addictive, and ultimately ruinous. While the boom lasted, securitizations helped Wall Street become an increasingly powerful force in the U.S. economy.

Efficient-market hypothesis: Based on the notion that future movement of the market it random, the EMH claims that all information is immediately priced into the market, making it “efficient.” As a result, the hypothesis states, it’s not possible for investors to beat the market on a consistent basis. The chief proponent on the theory is University of Chicago finance professor Eugene Fama, who taught Cliff Asness and an army of quants who, ironically, went to Wall Street to try to beat the market in the 1990s and 2000s. Many quants used similar Fama-derived strategies that blew up in August 2007.

Authorities had little idea about the massive losses taking place across Wall Street. That Tuesday afternoon, the Federal Reserve said it had decided to leave short-term interest rates alone at 5.25 percent. “Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing,” the Fed said in its policy statement. “Nevertheless, the economy seems likely to continue to expands at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.”

The crisis was mounting, and Washington’s central bankers were completely out of touch. The losses on Monday and Tuesday were among the worst ever seen by quant hedge funds, with billions of dollars evaporating into thin air. Wednesday they got far worse.

Thorpe was familiar with Scholes, Merton, and Meriwether—but he hesitated. The academics didn’t have enough real-world experience, he thought. Thorpe had also heard that Meriwether was something of a high roller. He decided to take a pass.[29]

G.        The Myth of the Rational Market

. The cover to the book, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, states:

The efficient market hypothesis—long part of academic folklore but codified in the 1960s at the University of Chicago—has evolved into a powerful myth. It has been the maker and loser of fortunes, the driver of trillions of dollars, the inspiration for index funds and vast new derivatives markets, and the guidepost for thousands of careers. The theory holds that the market is always right, and that the decisions of millions of rational investors, all acting on information to outsmart one another, always provide the best judge of a stock’s value. That myth is crumbling.[30]

H.        The Austrians

. The Myth of the Rational Market discusses the Austrian school:

The Austrians are known for their free market bent, but the school of economic thought that developed in Vienna in the late nineteenth century also held a healthy respect for uncertainty …[31]

The new finance had sprung from the rib of this newly scientific economics. In economics, the core tenet was that people were rational. In finance, it was that financial markets were rational. This was, for a time, a spectacularly productive starting point. By making a simplifying assumption about the real world, finance professors were able to produce research that was enormously useful …[32]

The psychologist [Hersh Shefrin] could not resist springing one of his quizzes on the finance professor [Richard Thaler]. [Amos] Tversky asked [Michael] Jenson to describe how his wife made decisions. Jensen regaled him with tales of her irrational behavior. Tversky asked Jensen what he thought or President Jimmy Carter. An idiot, Jensen said. And what about the policies of the Federal Reserve chairman? All wrong. Tversky continued listing decision makers of various sorts, all of whom Jensen found wanting. ‘Let me see if I’ve got this straight,’ Tversky finally said. ‘When we talk about individuals, especially policy makers, they all make major errors in their decisions. But in aggregate, they all get it right?’…[33]

The leap from observing that it is hard to predict stock price movements to concluding that those prices must therefore be right was, [Robert Shiller] declared at a conference in 1984, ‘one of the most remarkable errors in the history of economic thought. It is remarkable in the immediacy of its logical error and the sweep and implications of its conclusion’ …[34]

Economists in the Austrian tradition avoided equations not just because they were poor mathematicians, but because they thought equations failed to allow for the uncertainty and change inherent in economic life.[35]

I.          Can the market be right?

The profundity lay deep in the details, but the absurdity is right on the surface. The gist of the concept is that markets are the expression of all the information and preferences available. They are, therefore, perfect: They reflect the agglomerated judgment of all market participants. By contrast, any single participant—a lone investor, for example—will have much less to go on … [H]is judgment is deficient. He is wrong, and the market is right.”[36]

J.          A false assumption—“they must know what they are doing.”

One sobering lesson of Suzanne McGee’s surgical deconstruction of Wall Street is that when it comes to the financial crisis there is no more dangerous assumption than “well, they must know what they’re doing.” On the contrary, what used to be nobly attributed to strategy can better be explained by ego, rampant self-delusion, and the obsession with being the biggest toad in the puddle for its own sake. McGee’s book forces us to confront whether we want our economic future to be determined by playground daredevils or responsible grown-ups.[37]


A.        Switzerland—as an example

.1.         Personal meeting

Set up a personal meeting for the client if possible.

2.         Determining background

Determine if the advisor has regulatory, civil, or criminal convictions or complaints pending.

3.         Personal visit

Arrange for the client to personally visit the offices of the advisor or firm if possible.

4.         Determine regulatory body of advisor’s firm

Determine whether the advisor’s firm is regulated by either the banking commission or a self-regulatory organization (SRO).

5.         CV and personal references

Obtain CV and personal references of the manager and/or key personnel.

6.         Information about strategy

Obtain information from the manager or the advisor to provide in-depth information about strategy and track record.

7.         Ask to speak with existing clients

Ask the manager or the advisor if you can speak with existing clients of the firm.

8.         Good standing

Ask the manager for a confirmation of good standing from the criminal registry.

9.         Professional credentials

Determine the professional credentials of the manager and the individual advisor who will be managing the account(s). These credentials may include designations, such as: Certified Financial Analyst (CFA),[38] Masters of Business Administration (MBA), or AZEK. [39]

10.       Determine professional organizations

Determine the professional organizations to which the manager and the individual advisor belong or are members, such as the CFA Institute.[40] Make sure that the organization and the manager are in “good standing.”

B.        Hong Kong and Singapore—as examples

1.         Personal meeting

Set up a personal meeting for the client if possible.

2.         Determining background

Determine if the advisor has regulatory, civil, or criminal convictions or complaints pending.

3.         Brand conscious

Many of the advisors in Asia are “brand conscious,” which allows some of the advisors to deliver sub-standard products and services.

4.         Word-of-mouth dictates

Asians, as well as American expatriates (whether U.S. citizens or not), state that if a friend recommends an advisor, that advice is taken and the advisor is hired. This reflects that the friend is now on the hook for a referral, which is something that is taken very seriously in the Singapore and Hong Kong world.

5.         The “tea party” chat

Asians love to chat over tea, lunch or dinner, several times, and this is fundamental. You must understand this when getting to know Asian advisors.

[1] James Grant, “Is the Medicine Worse Than the Illness?” WSJ (Dec. 20, 2008).

[2] Suzanne McGee, Chasing Goldman Sachs, 163 (Crown Publishing Group, 2010).

[3] See:


[4] See Jack Waymire, “Who Controls Your Financial Advisor,” Worth, ed. 01 (Feb./March 2011).

[5] Jack Waymire, “Who’s Watching Your Money? The 17 Paladin Princples for Selecting a Financial Advisor,” Ch. 12 (John Wiley & Sons, Inc., 2004).

[6] See Patricia C. Brennan, CFP, “How do I Protect Myself Against Financial Fraud,” Worth, v. 19, issue 06, p. 84 (June/July 2010).

[7] See Jack Waymire, “In Search of the Next Madoff,” Worth, v. 19, issue 09 (Dec./Jan. 2011).

[8] See http://www.cfp.net/learn/knowledgebase.asp?id=6  for a list of questions to ask your CFP.

[9] See http://www.cimaconsultant.org/.

[10] See http://alm-editorial-us.msgfocus.com/c/11wxARZU8247F6g0Wve

[11] See http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1202485621566

[12] Suzanne McGee, Chasing Goldman Sachs, 59 (Crown Publishing Group, 2010).

[13] Suzanne McGee, Chasing Goldman Sachs, 270-271 (Crown Publishing Group, 2010).

[14] Scott Patterson, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed it, 216-217 (United Sates by Crown Business, Crown Publishing Group, 2010).

[15] Scott Patterson, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed it, 265 (United Sates by Crown Business, Crown Publishing Group, 2010).

[16] Ron Paul, End the Fed, 99 (Grand Central Publishing, Hachette Book Group, 2009).

[17] Ron Paul, End the Fed, 101 (Grand Central Publishing, Hachette Book Group, 2009).

[18] Simon and Schuster, Webster’s New Universal Unabridged Dictionary, 2nd Edition (1972).

[19] Doug French, Mises Circle in Manhattan conference, the Ludwig von Mises Institute, May 21-22 2010, New York, New York: Austrian Economics and the Financial Markets, “Mirror, Mirror on the Wall, When is the Next AIG to Fall?”

[20] Doug French, Mises Circle in Manhattan conference, the Ludwig von Mises Institute, May 21-22 2010, New York, New York: Austrian Economics and the Financial Markets, “Mirror, Mirror on the Wall, When is the Next AIG to Fall?”

[21] See http://www.econlib.org/library/Enc/KeynesianEconomics.html

[22] See http://www.econlib.org/library/Enc/Monetarism.html

[23] See http://mises.org/etexts/why_ae.asp

[24] See http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20110302/FREE/110309950/-1/INDaily01&dailycount=11&issuedate=20110302 (you must register for this free publication in order to access the article).

[25] William Bonner and Addison Wiggin, Financial Reckoning Day: Surviving the Soft Depression of the 21st Century, 81 (John Wiley & Sons, Inc., 2009).

[26] Nassim Nicholas Taleb, The Black Swan—The Impact of the Highly Improbable, 150-151 and 163 (Random House, 2007).

[27] Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk, 304-305 (John Wiley & Sons, Inc., 1996).

[28] James Grant, Mr. Market Miscalculates: The Bubble Years and Beyond, 140-145 (National Book Network, 2008).

[29] Scott Patterson, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed it, 97, 170-171, 197, 216-217, 324 (United Sates by Crown Business, Crown Publishing Group, 2010).

[30] Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (HarperCollins Publishers, 2009).

[31] Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, 49 (HarperCollins Publishers, 2009).

[32] Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, 107  (HarperCollins Publishers, 2009).

[33] Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, 191  (HarperCollins Publishers, 2009).

[34] Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, 197  (HarperCollins Publishers, 2009).

[35] Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, 301  (HarperCollins Publishers, 2009).

[36] William Bonner and Addison Wiggin, Financial Reckoning Day: Surviving the Soft Depression of the 21st Century, 81 (John Wiley & Sons, Inc., 2009).

[37] Suzanne McGee, Chasing Goldman Sachs, back cover (Crown Publishing Group, 2010).

[38] See https://www.cfainstitute.org/pages/index.aspx.

[39] See http://www.azek.ch/en/welcome.asp.

[40] See http://www.cfainstitute.org/genindex.html



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