Sunday Stanford

The Stanford story is picking up a lot of steam, to the point at which it’s becoming hard to keep up. A lot more information is coming to light about Stanford’s investments, many of which seem to be in highly-illiquid small-cap stocks. Remember, for instance, the $62 million loan which Stanford refused to extend to Health Systems Solutions, thereby scuppering its deal to buy Emageon? Well, it turns out that Stanford owns Health Systems Solutions. The WSJ also reports:

Some Stanford International representatives have been recently advising clients that they can’t redeem their CDs for two months, a person familiar with the matter said. The bank says it has over 30,000 investors and more than $8.5 billion in assets, though it also says the larger group of which it is a part manages over $51 billion in assets.

I’ve been wondering about that $51 billion: we’ve heard a fair amount from holders of Stanford’s CDs, but what about Stanford’s other investors? Big Al, a commenter at Clusterstock, has an interesting theory:

The $50b number is smoke and mirrors. Its $8.5B at the bank and about $6.5b at the b/d (best as i can figure). The rest is ‘under advisement’ which is a game of semantics Allen plays. He has a broker in Houston calling on public taxing authorities. In total, those taxing authorities have about $35b of annual tax revenues. Stanford counts all this tax revenue as being "under advisement" and adds it to his AUM. Allegedly. In my opinion.

Who’s in charge of regulating the statements that financial groups make about such matters? The SEC? Finra?

The whole Clusterstock comments thread is worth reading for some interesting drilling-down into Stanford’s investments, as well as speculation about Stanford’s auditor, who seems to be operating out of an address in Enfield, London, in the same building as ZigZags, the unisex hairdresser.

Meanwhile the FBI is definitely getting involved in the investigation in Houston, maybe because they’re well aware that the SEC seems to be getting nowhere fast:

Another person familiar with the investigation said the SEC has been looking at the certificate-of-deposit business since at least 2007.

Alex Dalmady, the Miami-based analyst who broke the story wide open, has been following matters closely; his latest missive is here. He says that he shouldn’t be given full credit for this, and that if his article hadn’t appeared, both Matt Goldstein of BusinessWeek and Alison Fitzgerald of Bloomberg would have got there soon enough. Which I’m not sure about, especially given that their stories hadn’t got close to the lawyer stage yet: it’s very dangerous for a major media outlet to accuse a bank of being a Ponzi scheme, or even hint at it. That’s a recipe for bank runs, even if the bank is perfectly healthy.

It’s worth mentioning that Stanford does have defenders. One of them just sent me a lengthy email, making a number of points, which are at the very least worth airing:

1. The length of the SEC investigation: if fraud was as obvious as Dalmady makes it out to be, would the SEC really have dragged out its investigation this long?
2. Stanford’s 2004 aquisition of Washington Research Group: there were many other potential buyers, so Washington would have done due diligence on anybody buying it. Although maybe any Stanford fraud doesn’t go back that far.
3. Did investors in Stanford’s CDs go into the deal with their eyes open? They knew they were getting above-market returns and were taking Allen Stanford’s credit risk.
4. Did Stanford not report below-market returns in years which were great for markets generally? Does that not maybe "suggest some symmetry in their investment approach"?
5. A lot of the Stanford claims are coming from disgruntled ex-employees, or their friends, which means that they should be treated skeptically.
6. Is there any reason to believe that Stanford’s auditor, although small, wasn’t realiable?
7. Given the severity of the allegations, shouldn’t everybody be ultracautious in making them?

All that said, I’m not going to apologize for following this story aggressively. These points might have had more salience a few years ago, but the world has changed a lot since then:

First, we’ve had a global economic meltdown, caused primarily by the financial system. The base case now is no longer to trust financial institutions unless there’s a reason not to; if anything, it’s the other way around.

Second, Madoff.

Third, the rise of the blogosphere. We live in a world where anybody can and will publish anything they like. The only way to deal with that is to increase transparency and disclosure: if someone publishes false allegations against you, you rebut them in detail and in full public view. You can no longer hope to prevent them from making those allegations public in the first place.

Stanford’s PR operation knows this, of course, and its silence speaks volumes. Why didn’t Allen Stanford set up a conference call last week with his CFO and all the journalists and analysts following this story, trying to answer all their questions to the best of his ability? If you’re running a bank, you need nothing more than the trust of the public. And Stanford’s done nothing over the past week to try to regain that trust. Which is very weird, if he’s not a fraud.

Update: Alex Dalmady emails to point out that according to Stanford, 90% of its assets are "up to 1 month Assets", which implies that they’re actually shorter duration than the CDs which make up its liabilities. In turn, that would seem to imply that Stanford, almost uniquely among banks, is not susceptible to a bank run at all.