Difference between interest on BALANCE and on PRINCIPAL

OK, this came up because of an offer by Citybank... they were offering a loan through the credit card, at an interest rate of 2.72% pa... lower than fixed deposit, right? Arbitrage opportunity?

WRONG.

Because the 2.72% is based on PRINCIPAL, not on balance outstanding. There's a big difference. This means the effective interest rate is actually 5.44%, ie double.

Let me explain with a simplified example, why interest on principal loan is always higher than interest on balance.

Let's talk about a 2 year loan of 2 million, at 10% per annum, and installment is once a year.

For interest on balance, repayment schedule is:
end 1st year: repay 1million + 200k interest (10% of 2 million balance).
2nd year: repay 1 million + 100k interest (10% of 1 million balance)
interest=300k

For interest on principal.
1st year: repay 1m +200k interest
2nd year: repay 1m + 200k interest (10% of 2 million principal!)
interest 400k

So this citybank interest on principal loan is actually higher than stated.

BTW, the above example, it's only 33% higher because there's only 2 repayments, the difference becomes higher the more repayments are made over time.

Genneva - I don't understand how it's clients are so blur!

I don't understand how so many people think that Genneva is a legitimate company that makes it's profit through selling gold.

The worst part is that many of it's "clients" are actual BUSINESSMEN who sell goods and services to make their living.

Since someone didn't like my "proton car" example and said car depriciates but gold appreciates, I'll simplify and repeat my explanation, hopefull improving it.

Let's take a construction company. Sime Darby. Property appreciates too, right?
So, let's say it costs them 500k to build a house. They sell it for RM1million.

1) Do you think that Sime Darby can afford to pay you 240,000 a year as hibah, as a present for buying the house from them???
If Sime Darby came up with this sort of deal, would you go for it???

2) If Sime Darby signs a contract where they have to buy the house back from you at RM1m after 6 months... do you think Sime Darby can do that???
More importantly, as a business person... if you buy 1kg rice for RM3 and sell it to me for RM5... but I turn around and return it to you and get back my RM5... how much profit have you made? ... that's right, NOTHING, it does not matter how much "profit" you make on a sale if the goods and money are returned!

So, what about a company that combines 1) and 2) ?  In other words, Genneva is a company that MAKES NO PROFIT. ZERO. And yet somehow it pays out lots of money.

And none of it's "investors" are suspicious? ...

Generally, I would say that these "investors" are partially guilty of being party to an illegal activity. Because, essentially, all of them are having the attitude "I don't care where Genneva get's it's money from, as long as they pay me my due portion"
So, if Genneva is found guilty of illegal money laundering and all these investors lose their money, it's pretty much comparable to a bunch of people who invested in an unlicensed massage parlor which gets closed down. Sorry for your loss, but you were investing in an illegal activity in the first place...

What the newspapers didn't mention on Genneva -> Financial Ruin for some.

I've been following this Genneva thing for years... as a student of Economics, I always felt it was educational to watch a Ponzi scheme all the way from the good times all the way to collapse, instead of merely doing case studies "in hindsight" (while actually most famous economists are only really good at hindsight analysis lol)
Along the way, I tried to advise against putting money in, and I was cursed, ridiculed, and jeered at. Which is pretty normal for the "returns being given" phase of any Ponzi scheme.

Anyhow, the newspapers only mentioned that investors will lose a source of monthly revenue, and also that they stand to lose the 20%-30% markup they paid for their purchased gold.
So, someone who had RM1,000,000 in the bank, and bought RM800,000 worth of gold with it stands to lose RM200,000, right? Not good, but still survivable, right?

Not for some.

For some, the scenario is much MUCH worse, thanks to many Genneva clients taking stupid advice from the Genneva agents to "leverage" their income. Because the suggested method was through Islamic Banking quasi loans with the gold as collateral. Let me give an example of what happens using the same above ex-millionaire.

Bob starts with RM1,000,000.
He goes to Genneva, pays RM1m, gets 800k worth of gold. Genneva promises him an income stream of 2% ie RM20k per month. They promise to buy the gold back at RM1m upon maturity.

NOW, under his agent's advice, he goes to Al-Rajhi bank and gets an "Islamic loan", which is similiar to a normal loan but with worse terms. Basically, they take the 800k worth of gold as collateral, and give him 75% on it, RM600,000. BUT, the interest (they call it a protection fee for storing the gold) is based on the 800k, and they charge 1% per month!

So, now Bob has RM600k in his pocket, 600k debt, and 800k being held as collateral.
The 800k is an asset, but a quasi asset, as people who have failed to service their loans would know!
He also has a promise from Genneva that they will buy his 800k gold for RM1m.
He also has incoming 20k per month from Genneva and -8k a month from Al-Rajhi. Sounds good so far, right?

So Bob follows his agent's advice and further "leverages" himself.
He goes to Genneva, gives them 600k, and gets back 480k worth of gold.
He goes to Al-Rajhi (AR) and gives gold, gets 360k.

Current Status:
360k in pocket, 960k debt,  1280k gold held as collateral (gc) and an option to sell the gold back (goldoption) for RM1.6m.
Income stream 32k Genneva, -12.8k Al Rajhi.

He does it again.
-RM360k, + 288k gold.
-288k gold, + RM216k.

Status:
RM216 pocket, RM1.176m debt, 1.568m gc, goldoption 1.96m.
Income 39.8k Genneva, -15.68k AR

Let's stop here even though this could continue a few more rounds.

Anyhow, *IF* Genneva honors the agreement, at the end of 1 year, Bob redeems everything, and his status is now:
1960k (since he sells the gold, the 1.568m no longer comes into play)+216k-1176k +(39.8k x 12) - (15.68k x 12)
=RM 1m (his initial bank account) +477.6k -188.16k (the income streams)
=RM 1,289,440.
Bob makes a nice 29% profit in one year! He is happy!

BUT
If Genneva does not honor the agreement? For example, if the company ceased operations? Bob's status BEFORE HE GOES TO REDEEM HIS GOLD FROM AR is:

216k - (15.68k x 12)   (he has had to pay AR the monthly interest/ protection fee still!)

=  27.84k in his pocket!

And now, there are 2 possibilities at this point, actually. Cause in case you didn't notice, Bob only has RM27.84k in his pocket, and his debt is RM1176k. He can't get back his collateral unless he finds someone to lend him the money to get back his collateral!

Case A, someone lends the money to Bob:
Bob redeems his loan, get's back his gold.
Bob now has 27.84k in his pocket, RM1.176k debt to whoever gave him this new loan, and he has RM1.568k worth of gold.
He now has to figure out what to do with that gold!
If he manages to sell it for RM1.568k, his situation is not so bad.... that means that after squaring his debt, he now has 1568-1176+27.84= 419.84k.  This is a pretty bad drop, from RM1m, but Bob can still survive it.

However, if gold price has dropped, OR if he can only sell his gold for a lower price (VERY likely, gold shops and banks and other people who buy gold will take their share of the profit), Bob will lose even more. If he loses 10% when selling the gold, he now has 263k. If he loses 20%, he only has RM106k. Bob is now looking at some VERY serious lifestyle changes if he lost 90% of his savings.

How about Case B, where Bob cannot get anyone to lend him money?

Well, his situation is then that he has 27,84k in his pocket, and he's completely at the mercy of Al-Rajhi bank! I have no idea what happens in the case of default in this scenario, I need an expert in Islamic Banking Syariah law to explain this scenario to me.
But as far as I know, AR is still holding onto the gold, and therefore they are still charging him 15,680 per month as protection money, so AFAIK, Bob goes bankrupt in 2 months...

...

And don't get me started on the people who didn't have RM1m in the first place, like Bob above.
I've heard of plenty of people who took out loans to buy their initial "investment" in the first place... those people are now in EVEN WORSE TROUBLE than Bob in scenario B... they are ALREADY bankrupt, and have loan payments that they CANNOT MEET.

...

Makes the 20%-30% losses described in the newspaper look absolutely pleasant by comparison, doesn't it?

Samudera aka Genneva Gold Ponzi scheme.

I've more or less left this blog inactive, but I'm returning momentarily just to blog about this scam/ scheme which recently caught my attention. Of course, it's old news to some people, but then again, some other will not have heard of this at all.

This Ponzi scheme is done by the company Genneva Gold Sdn. Bhd.

What the deal involves is: They will sell you gold bullion at a marked up price. Say 1 kilo of gold costs RM130,000 today. They will sell 1 kilo of gold to you for RM170,000.
Now, here is the interesting bit. They also offer you a buyback guarantee at your initial buying price of RM170,000 in 6 months time. On top of that, they also give you a MONTHLY rebate of between 2% and 2.5%. That's 24-30% per annum! Sounds too good to be true?

That's cause it IS. I have double checked with several agents from Genneva aka Samudera, and they have replied that this gold trading is the sole source of revenue for the company.

Here is the basic problem in a nutshell: Effectively, Genneva is borrowing from customers at 24% per annum, with gold bullion as collateral, with a term of 6 months. This is pretty ridiculous, seeing as how bank borrowing rates are at around the lowest in history. It makes no sense for them to borrow from the public at grossly inflated prices.
The thing is, these agents are (stupidly) saying that Genneva is generating profit, because their cost price for the gold was RM130,000 and they sell to you at RM170,000. They are completely WRONG, and are complete idiots. Let me illustrate to you. Let's say, for example, you have a Proton car, which you bought for RM50,000. You sell it to me for RM1 million. Then you pay me interest of RM 20k a month. Then at the end of 6 months you buy it back from me at RM1 million. Do you think you made a profit? ... no, OBVIOUSLY. You have made a spectacular loss of RM 20k x 6 = RM120k.

In other words, what we have here is a company that does nothing but borrow money, it pays out super high interest rates using said borrowed money.

This is the very definition of a Ponzi scheme in action.


Honestly, there are a lot of very gullible people out there.

The trouble is, just like any other ponzi scheme, they are still paying out their "investors" right now. And boy are those investors crowing about their fabulous returns.

It's actually a very interesting pschological exercise. You can see how cocky and confident all those current investors are now and how they tell non-believers that they are being foolish for not taking the offer. I'm watching with bated breath to see what will happen when the scheme eventually collapses.

BTW, the company is under investigation by Bank Negara, changed itself to Samudera to resume operations, now it's changing back to Genneva, and is now operating under shariah regulations from BNM.

Urban Barns Foods - Scam?

Well, well, well... I'm making a brief return, to comment on this company.

I was very very interested... stock is slightly above $1... they claim it will hit $14... all based on the strength of it's product. Admittedly, the product looks good... they claim to grow vegetables organically, in 1/4 the time and 1/100th the land area.

http://www.stockmoversdaily.com/alerts/urbf-featured-alertq.html

Looks good doesn't it?

Now, how about the annual report?

http://www.faqs.org/sec-filings/091113/Urban-Barns-Foods-Inc_10-K/

...

OH MY DOG.

We have a total of 100,000,000 authorized common shares with a par value of $0.001 per share with 43,400,000 common shares issued and outstanding on July 31, 2009. Subsequent to July 31, 2009, on August 19, 2009, our 7 for 1 forward stock split, approved by the Board of Directors on July 22, 2009, became effective resulting in there being 43,400,000 shares of common stock issued and outstanding. Cash provided by financing activities for the period from inception (May 21, 2007) through July 31, 2009 was $72,000 consisting of 1,600,000 shares of common stock that were issued to our director, Mr. Hassan, in exchange for $8,000 US, or $.005 per share and 3,200,000 shares of common stock that were issued to twenty six investors for $64,000 or $0.02 per share pursuant to our Registration Statement on Form SB-2. An additional 1,400,000 shares were issued to Mr. Hassan in exchange for $7,000 in mineral property costs that he paid on behalf of the company.


Acquisition costs of the potential business 12 months $80,000

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has had no operation since inception and generated a net loss of $77,150, which raises substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

TOTAL ASSETS $ 3,098

TOTAL STOCKHOLDERS' EQUITY $1,850

WHEE!!!

WTF???

That's not $1.8 million... that is 1.8 thousand dollars!

By the way, guess what the market value of the company currently is, at around $1?

Slightly over $43 million, since they have 43,400,000 shares floating around.

...
...
...


I am an ANGRY INVESTOR!!! HEAR ME ROAR!!!

This is absolute absolute absolute bullshit!!!!

$14 a share???

This isn't even worth it's original $0.001 a share!

Run! Run! It's POISON!

...

I suppose they might turn it around and actually try running a business with it, but, currently, it is NONSENSE! RUN I say, RUN!!!

Barclays: CLOs? Being used to raise capital? ... geez.

http://www.thestreet.com/story/10487846/1/barclays-massive-loan-pool-eludes-notice.html
(apologies to thestreet.com... forgot to quote them in my unedited post. Sigh. unintentional plagiarism...)

A more than $30 billion pool of corporate loans managed by Barclays (BCS Quote) has slipped by virtually unnoticed, but merits close scrutiny as it sheds light on central bank lending standards loosened by regulators' fight against the global economic downturn.
The transaction, dubbed Newfoundland and rated triple-A by Moody's Investors Service looks to be the largest collateralized loan obligation ever issued, by a large margin. Most CLOs are in the $300 million range and anything over $1 billion is considered large, according to Bill May, an analyst at Moody's.
"It's certainly the biggest CLO I've ever heard of," May says.
Its purpose is almost certainly to allow Barclays to use its corporate loan portfolio as collateral to obtain short-term funding from a central bank, according to May and other analysts and economists. They are divided, however, on whether the European Central Bank or the Bank of England is the more likely lender. Neither central bank responded to requests for comment.
Barclays declined to discuss the transaction, which it does not appear to mention in its public regulatory filings and the existence of which was unknown even to close followers of the company like Sandy Chen, analyst at Panmure Gordon.
"The more light that can be shed on this, the better," Chen says.
Further, Tavakoli worries the central banks could be stuck with assets worth far less than they think. "It's kind of disturbing that the Fed and the ECB have decided to take on this kind of collateral, and they're really not equipped to scrub it," she said in a follow-up phone interview.
Collateralized debt obligations -- a broader category that includes CLOs and collateralized bond obligations -- are probably the best example of the so-called "toxic" securities at the heart of the current crisis. They have led to hundreds of billions in writedowns over the past year, wreaking havoc at once-proud institutions like Merrill Lynch, UBS (UBS Quote) and Citigroup(C Quote).
Since the crisis began, buyers for these instruments are scarce to non-existent. However, some banks have created so-called balance-sheet CLOs like Newfoundland in order to use their troubled loans as collateral to obtain short-term financing from central banks. The best-known example of such a transaction is a $2.8 billion CLO, known as Freedom, issued last year by Lehman Brothers.
How many other banks are creating balance-sheet CLOs to borrow from central banks is difficult to know. Morgan Stanley analyst Vishwanath Tirupattur says there are others, though he is not aware of any that rival even Freedom in size, much less a $30 billion giant like Newfoundland. Such information is hard to come by, however. Even though he specializes in CLOs, Tirupattur was unaware of the second $16 billion issue from Newfoundland last month.
"Some of these balance-sheet deals are not broadly distributed. I mean they're not distributed at all," Tirupattur says.
That's because investors are too spooked to buy them, for now. Whether they will ever return to the market for such highly complex products remains to be seen. It is ironic, however, that banks are now creating new structured securities like Newfoundland to extract themselves from the very mess such securities created in the first place.
The Moody's report explaining the triple-A rating given to Newfoundland last month is highly technical, referring to a "Correlated Binomial Expansion Technique," and a "weighted-average rating factor of 1040."
While there may not yet be a market for these securities, the fact that banks are still producing them is an ominous sign to people like John Kanas, a consultant to private equity investors and the former CEO of North Fork bank, bought by Capital One Financial Corp. (COF Quote) in 2006.
"There should be a loud and clear voice demanding us to go back to simplicity and away from these esoteric products, but frankly I may be a lone voice in the wind because the creation and sale of these products is a very profitable business," Kanas says.


-----


What do I have to add here? ... all that needs to be said has been said.

Basically, we not only have Barclays creating a HUGE *potentially* toxic asset... it's a NINJA asset! Hidden and kept as secretive as possible.

And no one is worried about this? ... oh really?

...

Now the hope is that these ninja assets do not really act like ninjas. You know... remain hidden, and then kill the target at the most opportune/inopportune moment!

...

Still, one lesson that has been drummed in lately. Capitalism might have many flaws, but one principal seems to be very very important: Lack of transparency is a cause for alarm. Corporate dishonesty is a sign to run and not get involved.

Sarah Palin... dumb bimbo.

Meh... I would not invest in anything that has too much of Palin's touch on it... she's clearly a bit of an airhead.

BTW, all those people who swallowed her no-abortion propoganda? ... Her daughter is now a single mother. Levi Johnston has broken up with Bristol. The marriage and happy ending that they were going on and on AND ON AND ON about throughout the presidential campaign? ... that turned out to be... duh, propoganda.

And Bristol is STILL being *USED* by her useless mother, who keeps claiming to be a FAMILY oriented woman... Bristol is being forced to advocate avoiding birth control and advocating abstinence. ... in her school. I mean, come on, the girl is trying to go through college life, can't you let her just put the matter behind her and try to live as normal a life as she can salvage now? MUST you turn your daughter into a "you should do the right thing or you will end up like me" case, Sarah Palin?

Isn't that a little heartless?

....

Personally, I think Palin is a moron. There are actually so many political issues in the world, it's really more sensible to just pick some others and reduce exposure to the whole sex and pregnancy issue for the time being... maybe possibly forever.

Anyhow, Alaska does not seem the greatest place in the world to put your money, as long as the person in charge is Sarah Palin!

General Growth Properties Files for Bankruptcy

http://dealbook.blogs.nytimes.com/2009/04/16/general-growth-properties-files-for-bankruptcy/?ref=business


General Growth Properties, one of the largest mall operators in the nation, filed for bankruptcy early Thursday morning in one of the biggest commercial real estate collapses in United States history.
Despite bargaining for months with its creditors, General Growth faced dwindling options for handling its more than $25 billion in debt, largely in the form of short-term mortgages that will come due by next year.

-----

http://www.scribd.com/doc/14277534/General-Growth-Properties-Bankruptcy-Filing

THIS is the really interesting bit.

Number of creditors: over 100,000. Amount of liabilities: over 1 billion. Huh. They ran out of checkboxes. Interesting...

As someone commented, with the size of the bankruptcies these days, they need new forms... sigh...

Najib made a rather blatant statement which shows political favoritism

Before you say i am making up stories or slandering people, *I AM ONLY REPEATING WHAT WAS PRINTED IN THE NEW STRAITS TIMES!!!*

And NST is directly quoting Najib himself. So, I am not accusing Najib of anything. I am just repeating what was said by Najib, Bernama, and NST.

http://www.nst.com.my/Current_News/NST/Sunday/National/2517798/Article/index_html
Or, for those who want a physical copy of this, New Sunday Times, March 29, 2009, Page 5 of News Section. (under the picture of 2 cranes)

Having telephoned NST, they pointed out that they are only quoting Bernama, so they take no responsibility either.

Najib disclosed that a website to keep tabs on spending of the stimulus packages would be launched within the next two weeks.
He said RM1.5 billion would be spent up to the end of next month and RM2.5 billion by end of May.
"They involve about 32,000 projects, which would involve class F contractors, who are also loyal supporters of Umno."

Rm4 billion in 3 months. 32,000 projects.

And ALL OF IT IS GOING TO these *loyal supporters of UMNO*.


AFAIK, some of those projects have not even been tendered yet. And nonetheless, we already know the result beforehand. All of it is only going to loyal supporters of UMNO!

...

You're not really allowed to do such things. If you are going to be conducting such gross favoritism for UMNO supporters, that leaves all non-UMNO supporters 3 choices: convert to UMNO supporters, try to survive in a political and economic environment which is grossly skewed against you, or just give up on the country and leave.

It has been pretty much an open secret that there is a lot of money politics and government projects given based on political favoritism, so this is hardly anything new. In fact, when I called up NST and Bernama to investigate, the editorial staff informed me that "corruption is quite normal, so why do you sound so surprised?". Not my opinion, merely repeating what was said to me.

What is a bit much is the fact that Najib proudly admitted to this fact to our local media.

I mean, consider if the Obama made a statement that the bailout package was being given exclusively to Democrats. There'd be public, possibly international outcry!

At the very least, he would be forced to retract or amend his statement, but in a civilized country, any minister who made this sort of statement might end up having to step down.

...

It gives a poor impression of the country's transparency issues. And makes economic growth look rather difficult.

In a country where State Governments can change hands without reelections, and where billions can be assigned to party loyalists, with the PM to be boasting about it... this is all rather unethical. Not very good stuff at all.

All in all, I wouldn't advise anyone to hold any long term investments in Malaysia... sell and cabut. In any case, the drop here was much less than in other countries, so when the economy does rebound, you can expect other countries to post much bigger percentage gains than Malaysia.

Abortion... rape... and saving lives? (non investment post)

Excerpt from
http://www.nytimes.com/2009/03/28/world/americas/28brazil.html?hpw=&pagewanted=all


Weighing just 79 pounds and barely four feet tall, the 9-year-old girl, from Alagoinha, a town in the northeast, underwent an abortion when she was 15 weeks pregnant at one of the 55 centers authorized to perform the procedure in Brazil. Abortion is legal here only in cases of rape or when the mother’s life is at risk.

The doctors’ actions set off a swirl of controversy. A Brazilian archbishop summarily excommunicated everyone involved — the doctors for performing the abortion and the girl’s mother for allowing it — except for the stepfather, who stands accused of raping the girl over a number of years.

“The law of God is above any human law,” said José Cardoso Sobrinho, the archbishop, who argued that while rape was bad, abortion was even worse.

Doctors there said the girl’s uterus was too small to support one baby, let alone two.
Doctors said the girl would die if she carried the babies to term.

-----------

This has nothing to do with investments. Forgive me. But it just really pisses me off. I mean:

José Cardoso Sobrinho excommunicates basically everyone involved... EXCEPT for the guy who raped his 9 year old stepdaughter?

Abortion is worse than rape? Oh really? Big words coming from an old man... God should turn him into a 9 year old girl, and have him raped, pregnant, and told that he/she is going to die during the pregnancy.

And there's the practical side too: Seriously, which makes more sense, having 2 lives lost... or 3 lives lost?

...

Bloody idiot. Fortunatly, the president of Brazil and some of the Vatican overturned the ruling. But there's a split in the catholic church over the whole abortion issue.

Bah... economics and religion... the two biggest causes of war in history. Feh.