During the past few weeks, Toomre Capital Markets LLC ("TCM") has been busy working on client engagements and hence has had limited time to comment upon important sentiment and capital market developments. Since the start of December 2008, there have been a number of significant developments. Several of these deserve further detailed commentary that hopeful will be forthcoming before the end of the year.

First, the United States Department Labor reported a very sharp decline of some 533,000 jobs for the November period as well as significant adjustments to the prior reports for the September and October periods. In total, some 830,000 more jobs were reported lost over the most recent three-month period for a total of 1,156,000. Ouch! On a percentage basis of the workforce, this is the worst report since the recession period at the start of the Reagan presidency in the 1980s. Other economic reports have subsequently confirmed that economic activity sharply dropped around the time of the Lehman Brothers bankruptcy on September 15th and continued through November.

The sharp drop-off in both business investment and consumer demand since the Lehman Brothers bankruptcy has led many businesses to reevaluate their staffing needs. On Wall Street, there have been a considerable number of "redundancy" decisions leading to layoffs of more than ten percent of staffs. Many speculate that there will be further layoffs after the start of the 2009 if underwriting volumes continue at such non-existent levels. After all, what good is an investment banker if there are no deals to complete or capital to raise? Equally as well, what good are large staffs of salesmen and traders if there is no capital to commit or investors/hedge funds with whom to buy and/or sell?

On Main Street, the relatively sudden and very steep contraction in demand is leading to mass layoffs and even questions about whether the American automobile industry might survive. Clearly, the job losses witnessed in the last few months will continue and the fourth-quarter GDP will be sharply negative. Many macabre discussion wonders whether the 4th quarter GDP decline will be five, six or even eight percent on an annualized basis. Not many are willing to definitively speculate about what the first quarter of 2009 might be.

The Federal Reserve has responded in a very proactive manner to the down-turn in economic activity. The Federal Reserve lowered the effective Fed Funds target to a range of zero to 0.25 percent and announced further expansions in its alphabet soup of various special lending programs. Its decision to start to purchase GNMA, FNMA and FHLM mortgage pass-through securities, Agency debentures and highly-rated ABS backed by consumer debt has started a contraction in credit spreads relative to Treasuries. With many portions of the Treasury yield curve now yielding around two percent or less, the Federal Reserve clearly is encouraging investors to take on more risk premium than simply buying Treasuries and hunkering down in a bunker-like mentality seeking safety and no worries.

In the past month, three significant scandals have become public. In late November, Democratic Illinois Governor Rod Blagojevich was arrested by federal authorities who alleged that he was engaged in a "political corruption crime spree" that included recorded conversations about he might personally profit from the "sale of US Senate seat" to replace President-elect Barack Obama. While many not from Illinois might dismiss such charges as part and parcel of Chicago-area machine politics, the crassness of the conversations disclosed in the criminal complaint suggests that "pay to play" was very much a part of that Governor's mode of operation. No doubt with the Governor's subsequent pledge to "fight, fight, fight" the public will be exposed to more details about this repugnant public official.

The second scandal that recently emerged concerned the fraudulent activities of one Marc S. Dreier, the sole equity partner of a major law firm called Dreier LLP. He was first arrested in Toronto where he apparently was impersonating a lawyer at a Canadian pension fund in an effort to sell fake promissory notes to a unit of Fortress Investment Group. After spending several days in Canadian jail, he was released and then arrested again by American authorities upon his return to the United States where he was charged with defrauding several other hedge funds by selling or attempting to sell fake promissory notes based upon commercial real estate. Subsequently, the scope of his fraud was alleged to have totaled approximately $380 million. Surely more details about this fraud too will emerge in the coming days as this Harvard-educated lawyer languishes in the "comfort" of federal government custody.

The third scandal concerns the fraudulent activities of one Bernie Madoff. This former chairman of NASDAQ apparently ran an "investment" division within his well-known market-making firm. Some investors had invested with him for more than thirty years and were rewarded with steady returns in the range of ten to twelve percent each year. On December 11th, he was arrested after he confessed to his two sons who held senior executive positions in the market-making side of the family firm that the whole investment side of the business was one large Ponzi scheme. By his own admission, Bernie Madoff apparently defrauded investors world-wide of approximately $50 billion. He since has been released to supervised home confinement as various investigators search through his firm and the various fund of hedge funds firms that fed monies to his fraudulent operations. This Madoff scandal is going to continue to be in the news for many weeks to come and Toomre Capital Markets LLC will expand its posts on this scandal shortly.

Combined the dismal economic statistics, the large number of layoffs (that also apparently have continued in December) and the three above scandals have led many investors to pull back even further from making significant investment decisions. Liquidity continues to be quite poor in the capital markets and is likely to remains so through the early months of 2009. There is considerable speculation that the hedge fund redemptions will continue at a high rate as a result of the Madoff scandal as many investors flee the opaqueness of these investment pools and their relatively poor absolute performance during 2008.

There also is considerable uncertainty about what the earnings potential of large companies might be during 2009. The net result is that at least through the first quarter of 2009, Toomre Capital Markets LLC expects business activity to continue to decline and returns from investment activity to be relatively flat if not negative. It appears that few seem willing to make significant investment decisions until the depth and breadth of the economic downturn that accelerated in September 2008 becomes more fully known. Hence, it probably remains a prudent decision to keep one's powder relatively dry and to continue to deleverage wherever possible. In the meantime, the above scandals (and others that are likely to emerge with proverbial receding of the economic tide) will dominate many of the coming news cycles. Reader comments and thoughts are welcome.

Toomre Capital Markets LLC ("TCM") wrote yesterday about the likely coming indictments in the scandal concerning American citizen tax-avoidance schemes facilitated by the Swiss banking giant UBS. A day later the first of what are likely to be the first of several indictments was revealed.

On Wednesday, November 12th 2008, according to court papers unsealed that day, Raoul Weil, 48, chairman of global wealth management at UBS in Zurich, was indicted Nov. 6 in Fort Lauderdale, Florida. Mr. Weil is the top global wealth management executive at UBS. The case is U.S. v. Weil, 08-60322, U.S. District Court for the Southern District of Florida (Fort Lauderdale). A copy of the indictment is here.

According to the indictment, between 2002 and 2007 Raoul Weil supervised the Swiss bank's overseas activities that serviced some 20,000 US customers. The indictment alleges that by using encrypted laptops and other counter-surveillance techniques, Mr. Weil and his co-conspirators helped US customers conceal around 20 billion dollars in assets from the IRS. Mr. Weil apparently instructed fellow Swiss bankers to increase their cross-border activities knowing that such activity meant bankers would be violating US law.

Toomre Capital Markets LLC believes that it is significant that this very senior executive was indicted with only one charge: conspiracy. The maximum punishment apparently is a fine of $250,000 and/or imprisonment for up to five years. TCM believes that this indictment will serve to squeeze Mr. Weil to reveal what he might know about the activities of yet further more senior executives at UBS.

Late on Thursday June 5^th, Reuters ran a story indicating that the June 9^th court hearing for Bradley Birkenfeld, the former UBS private banker who is expected to plead guilty to tax conspiracy charges, has now been canceled. The cancelation apparently was requested by United States prosecutors and no new date has been set.

Toomre Capital Markets LLC ("TCM") has previously written on the Bradley Birkenfeld case here. TCM wonders whether this delay indicates that United States prosecutors have entered into settlement discussions with UBS that no doubt will lead to the release of the customer list of wealthy Americans who used the services of the UBS private banking division. Certainly, if that were the case, prosecutors would not want Mr. Birkenfeld publicly naming names until a settlement with UBS was completed and further investigations were at least started. TCM will be keenly watching for developments in this and associated cases over the coming weeks.

For publication on Friday, June 6^th 2008, The New York Times has produced an article by Lynnley Browning entitled Wealthy Americans Under Scrutiny in UBS Case. This article details some of the concerns that wealthy American clients of UBS are having much agitation ahead of the expected guilty plea on Monday, June 9^th 2008 of former-UBS private banker Bradley Birkenfeld to conspiring to helping a former American client, Igor Olenicoff, avoid paying taxes on some $200 million held in undeclared UBS accounts. Previous Toomre Capital Markets LLC ("TCM") posts on Bradley Birkenfeld and UBS can be found at this tag link.

The noteworthy fact that this article reveals "Under pressure from the authorities, UBS is considering whether to divulge the names of up to 20,000 of its well-heeled American clients, according to people close to the inquiry, a step that would have once been unthinkable to Swiss bankers, whose traditions of secrecy date to the Middle Ages. Federal investigators believe some of the clients may have used offshore accounts at UBS to hide as much as $20 billion in assets from the Internal Revenue Service. Doing so may have enabled these people to dodge at least $300 million in federal taxes on income from those assets, according to a government official connected with the investigation." [emphasis added]

If UBS were to reveal such a large list of wealthy Americans, there no doubt will be phenomenal anger directed against UBS and its CEO Marcel Rohner, who also just happens to be the head of the private banking arm when this supposed "wink and a nod" tax-avoidance activity supposedly occurred. Surely there will be considerable press coverage of this "tax scandal". There also no doubt will be considerable questioning by other UBS private banking clients about just what the value of supposed Swiss banking privacy truly is. This surely is to lead to some withdrawals and a likely decline in the UBS franchise value.

On the other hand, UBS could elect to fight the United States Justice Department. Of course, there likely then would be criminal charges against the institution itself to fight and the possible loss of United States banking and securities licenses. What the franchise value might be under such a scenario is anybody's guess. However, it is likely to be less than today's closing stock price. Would you want to own a deeply flawed investment banking franchise coupled with a disgraced private bank?

Toomre Capital Markets LLC suspects that this story is going to pick up a life of its own in coming days. With the American electorate entering the Presidential campaign season that is keenly focused on the economy and general tax policies, TCM strongly suspects that these rich Americans are about to be vilified as part of the contentious political season. UBS no doubt is going to receive plenty of bad publicity.

Earlier this week, Toomre Capital Markets LLC ("TCM") wrote about how UBS had advised current and former members of its private banking staff serving American clients to avoid traveling to the United States. The apparent concern was an indictment by American authorities against one of UBS's senior private banking executives, Bradley Birkenfeld, and a co-conspirator, Mario Staggl, a resident of Liechtenstein, a European principality where he is believed to remain at large. This tax-evasion case has led to on-going retention of Martin Liechti, who is UBS's Swiss-based head of international private banking for North and South America, as a "material witness."

Late on the afternoon of Thursday May 29^th 2008, The Wall Street Journal is reporting that Bradley Birkenfeld has apparently decided to change his plea to guilty. Apparently, in a federal court filing earlier in the day, a court clerk stated that Mr. Birkenfeld will change his plea at a hearing scheduled before U.S. District Judge William Zloch in Ft. Lauderdale, Florida on June 9th. He had previously pleaded not guilty.

The article continues "The former UBS banker is part of a larger probe that U.S. prosecutors are conducting into whether UBS advised wealthy American clients on ways to utilize complex corporate entities and off-shore locales to avoid paying U.S. taxes. The U.S. inquiry, which became public earlier this month, comes at a difficult time for UBS, which has written down some $38 billion in securities tied to subprime mortgage loans. A UBS spokesman wasn't immediately available to comment on Mr. Birkenfeld's court filing. Danny Onorato, a lawyer for Mr. Birkenfeld, said he could not discuss details of the agreement. A notice by the court clerk says the federal judge hearing the case 'will ask for a full confession' by Mr. Birkenfeld."

On Wednesday May 28^th 2008, the world awoke to the Financial Times (of London) headline UBS tells unit staff to avoid US visits. According to the FT, UBS has told current and former members of it private banking team responsible for rich US clients not to travel to the United States. Apparently, the reason for the move follows the recent indictment of one of the unit's former senior executives, Mr. Bradley Birkenfeld, who US authorities have accused of helping a billionaire client evade taxes. Perhaps the more genuine reason for the recommended travel restriction is that UBS may not yet want more negative publicity with the revelations of other wealthy Americans who sought to avoid taxes through illicit means arranged by UBS?

The FT article goes on to disclose that UBS has made legal counsel available to the more than 50 members of the private banking unit that had serviced American clients. UBS announced back in November 2007 that it had decided to wind down its cross-border private banking business with US customers, and many of these staff members have already left the private banking unit. Mr. Birkenfeld, an American citizen who has lived in Switzerland for some number of years was formerly part of the team headed by Mr. Martin Liechti, UBS' Swiss-based head of international private banking for North and South America. In April 2008, Mr. Liechti was detained by American authorities and remains in the United States as a "material witness."

Mr. Birkenfeld apparently was hired by Mr. Liechti because of his particularly close relationship with Igor Olenicoff, a US real estate tycoon, who reached a legal settlement with authorities last December. Apparently, because of his relationship with Mr. Olenicoff, Mr. Birkenfeld was able to negotiate a higher rate of remuneration than many of the other team members. Mr. Birkenfeld also apparently had only two major clients rather than the twenty or so serviced by other team members. The article concludes with information that Mr. Birkenfeld's relationship with the UBS private banking unit soured after UBS claimed that he not performed to expectations. Mr. Birkenfeld took legal action against UBS over his termination and then cooperated with the US authorities in their on-going investigations of UBS.

Toomre Capital Markets LLC ("TCM") has previously written about the hedge fund con artist Kirk S. Wright and his now-defunct Atlanta-based hedge fund management firm International Management Associates. (Interested readers might want to review the TCM posts entitled Update on Kirk Wright and IMA hedge fund fraud scandal or Kirk Wright, IMA Hedge Fund Manager, Arrested in Miami Beach.)

According to The International Herald Tribune, on Wednesday May 21^st 2008, this con artist was convicted in Atlanta Federal court of many fraud counts that effectively would lead to spending the rest of his life in Federal prison upon sentencing. From the article,

According to authorities, Wright and his company collected more than $150 million spread across thousands of client accounts since 1997 and used false statements and documents to mislead some of them to believe the value of those investments was increasing. Much of that money is missing.

Prosecutors said Wright had been lying to his investors since at least 2001 about their investments' performance and the balances in their accounts. He reported substantial investment gains almost every month; the evidence revealed that he lost almost every dollar invested in the market, prosecutors said.

They said he diverted millions of dollars of investor's money for personal expenses, including cash for himself and family members, jewelry, house renovations, a $500,000 wedding, up to six luxury vehicles, and multiple pieces of real estate, mainly in Atlanta and California….

According to the U.S. Attorney's Office in Atlanta, Wright could receive a maximum sentence of 710 years in prison, a fine of up to $16 million and be ordered to pay restitution to the victims. He already has been hit with a $20 million judgment as part of a civil suit filed by the Securities and Exchange Commission. Sentencing is set for Aug. 26.

On Sunday March 30^th 2008, The New York Post is reporting that the fourth largest investment bank, Lehman Brothers, may have been swindled out of as much as $400 million through its Japanese affiliate. Apparently Lehman Brothers could lose as much as 80% of the $489 million loan it extended in 2007 to a medical consulting firm Asclepius Ltd. owned by a Tokyo-based biotechnology firm called LTT Bio-Pharma. The loan was to be used to provide financing for hospitals buying medical equipment and was underwritten with certificates from Marubeni Corp., one of Japan's biggest trading firms. Earlier this month, when Lehman Brothers pressed Marubeni to repay the loan, that company claimed that the documents guaranteeing the loan were forged and that they were a victim of the fraud as well.

According to the New York Post, what appears to have happened is that rouge traders or employees working within Marubeni used forged documents to run the scam – which apparently amounted to a type of large scale Ponzi scheme that had roped in several U.S. investment banks including Goldman Sachs. Two rouge and now former Marubeni employees -- Shingo Yamaura and Takuro Nitahara – apparently convinced Lehman to help finance what it understood were Marubeni's equipment leases and supply contracts with hospitals. As part of its due diligence in extending the original loan, Lehman Brothers apparently requested and then met with the Marubeni general manager in charge of this area of the giant trading company. The only problem is that individual might well have been an impostor!

Toomre Capital Markets LLC ("TCM") is disappointed to learn that this former employer was the victim of this apparent fraud. However, TCM is reminded of the Wall Street dictum: know thy customer! As details of this story continue to become public, TCM suspects that there will be more news about the involvement of other American investment banks. One can well imagine the conversations that went on something akin to "Since Goldman Sachs is in the deal, we should [or need to] …" And perhaps the Lehman Brothers personnel did not perform as thorough a due diligence review as they might otherwise perform on a totally unknown lending opportunity. One thing is for certain though. Dick Fuld will not take this fraud loss without an extremely good fight!