Gallimaufry

Bayer AG (BAYN) fell the most in more than two years in Frankfurt trading after a rival to its Xarelto blood thinner outperformed in a study, prompting analysts to slash their sales estimates for the German drugmaker’s product.

Bayer dropped 6.3 percent, or 3.63 euros, the biggest decline since March 2009, and closed at 54.40 euros.

Pfizer Inc. (PFE) and Bristol-Myers Squibb Co. (BMY) yesterday published details of a study that positions their experimental drug apixaban, expected to lag Xarelto, as a potential leader in the $7 billion market for warding off strokes in patients with a condition known as atrial fibrillation. The research shifts the balance of power among the three competitors vying to replace warfarin, a 50-year-old medicine first used as rat poison.

“All is not lost for Xarelto,” Alistair Campbell, an analyst at Berenberg Bank in London, wrote today in a note to clients. “But it seems prudent to revisit our market share assumptions.” Campbell cut his peak annual sales estimate for the drug to $1.9 billion from $4.3 billion. He described Xarelto as “the most important pipeline drug and the main catalyst” for Bayer’s share price this year.

The Leverkusen, Germany-based company’s peak sales forecast of more than 2 billion euros ($2.85 billion) remains unchanged and Bayer is confident that the medicine will be “an effective option,” said spokesman Oliver Renner. Bayer markets the drug with New Brunswick, New Jersey-based Johnson & Johnson. (JNJ)

Merger Question
“Clearly this is not a good day for Bayer, but the debate now is about whether it becomes a very big product or merely a big product,” said Jack Scannell, a London-based analyst for Sanford C. Bernstein & Co. “It’s nothing like the kind of terrible situation where you have thousands of reps selling a product that suddenly turned out to be dangerous.”

It’s too early to say whether competition from apixaban will put pressure on Bayer to use acquisitions to build its pharmaceutical unit, Scannell said. He rates Bayer’s shares “market-perform.”

Bayer Chief Executive Officer Marijn Dekkers said in May the company would be open to a merger of equals to strengthen its health-care unit without paying a premium for a large acquisition. Bayer is relying on its two chemical units to drive growth this year, forecasting that revenue gains at the drug division will lag the market.

Bayer has declined 1.6 percent so far this year, trailing the 2.2 percent rise in the Bloomberg index that tracks 18 European drugmakers.

‘Ideal Drug Profile’
Pfizer and Bristol-Myers said that apixaban prevented more strokes with less major bleeding than traditional treatment in a study of patients with irregular heartbeats. Pfizer and Bristol-Myers plan to file for regulatory approval in the U.S. and Europe by year’s end, the New York-based companies said yesterday in a statement summarizing the data.

“As it stands today, we have to assume apixaban may well have come closest to the ideal drug profile,” Campbell said. He cut his recommendation on Bayer shares to “hold” from “buy.”

Both Xarelto and apixaban will compete for irregular heartbeat patients against Boehringer Ingelheim GmbH’s Pradaxa, approved last year, in the contest to replace warfarin, a sensitive medicine that requires regular laboratory tests to ensure patients get the proper dose.

Xarelto awaits U.S. and European approval in atrial fibrillation, an irregular heartbeat condition that puts patients at a higher risk for strokes. The Food and Drug Administration is expected to rule next month on the blood thinner for orthopedic surgery patients, a smaller market.

Aristotle Study
Apixaban has been shown effective in treating the minority of patients who aren’t candidates for warfarin, according to results published in the March 3 New England Journal of Medicine. It is better than aspirin in preventing strokes in these patients, the study found.

The new study, called Aristotle, compared twice-daily apixaban to warfarin in 18,206 patients with atrial fibrillation, according to a March 2010 description of the trial in American Heart Journal. The drug met its primary goal of showing apixaban wasn’t inferior to warfarin in preventing strokes and clots that cause blood-vessel blockages.

It also was successful in two secondary goals: the drug was more effective than warfarin and led to fewer cases of major bleeding, Pfizer and Bristol-Myers said in yesterday’s statement. Pradaxa, the rival from Boehringer, was more effective than warfarin with similar bleeding at a high dose and as effective as warfarin with less bleeding at a lower dose. Apixaban was more effective and safer, the companies said.

Spokesmen for Pfizer and Bristol-Myers declined to provide additional details about the study results. The findings will be presented at the European Society of Cardiology meeting in Paris in August.


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Pfizer Inc. and Bayer AG revealed study results today that may give their medicines a foothold in a $10-billion-a-year market to prevent clots that cause strokes and deadly lung damage.

The research provided evidence that Pfizer’s apixaban and Bayer’s Xarelto are as safe as existing therapy, which may ease concerns among doctors who are seeking a replacement for warfarin, a powerful and unwieldy blood thinner used for more than a half-century. Apixaban beat aspirin at preventing strokes in patients with irregular heartbeat, while Xarelto matched standard treatments for clots in the legs and lungs.

At stake is a share in a warfarin-replacement market that could reach $10 billion to $20 billion a year, according to an estimate from Seamus Fernandez, an analyst with Leerink Swann & Co. Doctors and patients will “insist” on using a replacement as soon as one is available for warfarin, which requires regular blood tests and can leave patients vulnerable to deadly clots or uncontrollable bleeding at too low or high a dose, said Ralph Brindis, president of the American College of Cardiology and a cardiologist at Oakland Medical Center in California.

“We’re getting pretty close to the holy grail in finding a replacement for warfarin,” Brindis said in an interview. “I don’t know which one is going to win or lose in that family, but the body of evidence is growing.”

Pfizer rose 5 cents, or 0.3 percent, to $15.91 at 4 p.m. in New York Stock Exchange composite trading, while partner Bristol-Myers Squibb Co. rose 23 cents, or 0.9 percent, to $26.08. Bayer rose 1.15 euros, or 2.4 percent, to 48.18 euros in Frankfurt trading, and partner Johnson & Johnson fell 28 cents, or 0.5 percent, to $57.02 in New York.

Boehringer’s Pradaxa
Boehringer Ingelheim GmbH may be the first drugmaker to win U.S. approval of a revolutionary alternative to warfarin, which is derived from rat poison. U.S. regulatory advisers will review Pradaxa, already approved in Europe to prevent clots following hip and knee surgery, on Sept. 20.

Pradaxa, apixaban and Xarelto interfere with the body’s own clotting mechanisms to minimize strokes, lung clots and extended leg clots, commonly at a risk of increased bleeding, Brindis said. Apixaban, which is still being tested, and Xarelto, which is approved in Europe for hip and knee surgery patients, appear to be effective and safe, perhaps safer than the current standard, he said.

Apixaban Results
Patients who took apixaban were 54 percent less likely to have a stroke or damaging clot than those who took aspirin in a study of 5,600 patients who couldn’t use warfarin, researchers said today at the European Society of Cardiology conference in Stockholm. Apixaban and aspirin showed a similar risk of major bleeding, a feared side effect of blood thinners, according to the study, dubbed Averroes after a 12th century Islamic philosopher.

“The use of aspirin will probably be reduced after this study,” said Harald Arnesen, a professor at Ullevaal University Hospital in Oslo.

Warfarin typically reduces the rate of stroke 40 percent more than aspirin, Larry Biegelsen, a New York-based analyst for Wells Fargo Securities, wrote in a note to investors on Aug. 30. That’s a less potent effect than apixaban showed in today’s trial.

Results from the larger 18,000-patient Aristotle study comparing apixaban with warfarin in patients with an irregular heartbeat called atrial fibrillation are expected in the first half of next year, Tim Anderson, a New York-based analyst with Bernstein Research, said today in a note to clients.

Xarelto Results
“Aspirin isn’t the recommended treatment simply because there’s significant amounts of clinical data that shows that in fact protection is greater on warfarin,” said Nick Turner, a London-based analyst at Mirabaud Securities, in a telephone interview today. “So exactly how well a drug compares to aspirin is probably not that significant.”

Xarelto matched the standard therapy of Sanofi-Aventis SA’s Lovenox plus warfarin at blocking blood clots in the lungs and legs, researchers said today in a study of more than 3,400 patients. Some 2.1 percent of those in the Xarelto group developed clots compared with 3 percent of people taking the older standard treatments.

Patients who took Xarelto were 33 percent less likely to develop either clots or major internal bleeding, Bayer said. The Leverkusen, Germany-based drugmaker is developing Xarelto with Johnson & Johnson. About 8.1 percent of patients in both treatment groups developed serious bleeding, the study found.

The company designed the study, dubbed Einstein-DVT, to see whether the once-a-day pill could match the existing therapies, which are “very, very effective,” said lead researcher Harry Bueller, of Academic Medical Center in Amsterdam.

Bayer’s Plans
Medicines to prevent clots after knee surgery or in the lungs and legs are a small part of the blood thinner market, said Flemming Oernskov, head of the women’s health and general medicine unit at Bayer. The much bigger market is in atrial fibrillation, Oernskov said in an interview.

Bayer has said it plans to present its trial on Xarelto versus warfarin in atrial fibrillation patients at the American Heart Association conference in November.

“We think that when all indications are there, we have all the trials and it has worked out well, it could be for us as a company over 2 billion euros in annual revenue,” the Bayer executive said. “You can imagine this market will be several factors higher than the 2 billion euros.”


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Bayer AG posted its first quarterly loss in seven years on a writedown of the Schering drug brand and said pharmaceutical sales growth isn’t likely to match the market this year.

The net loss totaled 145 million euros ($199.5 million), compared with a 153 million-euro profit a year earlier, the Leverkusen, Germany-based company said today in a statement. The result missed the average estimate of a 160.6 million-euro profit of 7 analysts surveyed by Bloomberg. Bayer said it’s targeting sales growth of 4 percent to 6 percent this year.

Bayer took a 405 million-euro impairment charge on the Schering brand, which it no longer plans to use. Bayer’s forecast shows drug sales growth hinges on a potential new best- seller, the blood-thinner Xarelto, said Karl Heinz Koch, a Zurich-based analyst for Helvea SA.

“It’s dependent on timing and growth rate for Xarelto,” Koch said in a telephone interview today. He rates Bayer’s shares “buy.” “What they’re saying is that 2011 will remain slowish.”

Bayer rose 1.38 euros, or 2.5 percent, to 56.18 euros in Frankfurt trading, the biggest gain in six weeks. The stock returned 14 percent including reinvested dividends in the past year before today, compared with a 34 percent return for the Bloomberg Europe Chemicals Index.

Three Divisions
The drugs and chemicals conglomerate is still happy with its three divisions selling medicines, plastics and crop chemicals, Chief Executive Officer Marijn Dekkers said in a press conference today.

Divesting a unit to raise cash for an acquisition would be an “extreme option,” Dekkers said.

“Looking is a big word,” the executive said in answer to a question about whether Bayer is seeking a deal big enough to require the sale of a unit. “You don’t have to look far, because there are only 20 companies that qualify as a big acquisition. We are at the moment happy with the three subgroups we have.”

Bayer estimates the market for new blood thinners including Xarelto may exceed 10 billion euros annually. The pill’s sales may peak at more than 2 billion euros, Dekkers said.

Bayer has said it expects U.S. regulators to decide this year whether Xarelto may be used in irregular heartbeat patients. Patients with an irregular heartbeat, or atrial fibrillation, make up the biggest market for the new blood thinners, according to Bayer. The company filed for approval to sell the drug for the same patient group in Europe in January.

‘Uncertainty’
“The uncertainty is large,” with investors expecting trial results this year for a rival product by Pfizer Inc. and Bristol-Myers Squibb Co., Jack Scannell, a London-based analyst for Sanford C. Bernstein Ltd., wrote in a note to investors before the results. Scannell rates Bayer’s shares “outperform” mostly because of the promise of the chemicals unit, he wrote.

Xarelto will face competition from a rival approved last year in the U.S., privately held German drugmaker Boehringer Ingelheim GmbH’s blood-thinner Pradaxa.

Revenue Forecast
Revenue rose 14 percent to 9.01 billion euros, exceeding the average estimate of 8.52 billion euros. Sales this year will be between 35 billion euros and 36 billion euros, the company said, less than the 36.1 billion-euro average estimate compiled by Bloomberg.

Sales at Bayer’s drug unit rose 7.3 percent to 4.47 billion euros. Bayer expects sales for the unit to increase by a low to mid-single-digit percentage this year, with earnings before interest, tax, depreciation and amortization showing a “small improvement” before special items.

Government reforms of health systems cut sales and earnings by 160 million euros last year. The cost will likely climb to between 270 million euros and 300 million euros this year, with more than 100 million euros of the impact coming from the U.S., Dekkers said.

Bayer booked the first 62 million euros of the estimated 1 billion-euro cost of a reorganization announced last year to shift resources to product development and emerging markets. The reshuffle will cost 500 million euros this year, Dekkers said.

The company also said last year it would unify its health operations under the name Bayer, eliminating the Schering brand acquired in its 2006 purchase of German rival Schering AG.

Revenue from plastics and other chemicals at the MaterialScience division rose 28 percent to 2.58 billion euros.

Sales of pesticides and other crop chemicals increased 18 percent to 1.65 billion euros.


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Pfizer Inc. (PFE)’s and Bristol-Myers Squibb Co. (BMY)’s Eliquis will lead the market for stroke-preventing blood thinners after “best-in-class” clinical trial results that marry safety with effectiveness, analysts said.

The twice-daily pill had a 31 percent lower risk of major bleeding, a feared side effect of blood thinners, than the current standard treatment, warfarin, researchers said yesterday at the European Society of Cardiology’s conference in Paris. Patients on Eliquis had an 11 percent reduced risk of dying, the first time a warfarin replacement has saved lives in a study.

Pfizer and Bristol-Myers may now take 60 percent of the market for blood thinners to ward off strokes in people with an irregular heartbeat, according to analysts for ISI Group and Leerink Swann & Co. Leerink estimates sales of warfarin replacements will reach $7 billion to $9 billion a year.

“The bleeding profile is phenomenal and trumps everything else,” Mark Schoenebaum, a New York-based analyst for ISI, said in a telephone interview. “Clearly, this drug will be the leader in the market.”

Yesterday’s results may mean an additional $1.1 billion in peak sales for Eliquis, also known as apixaban, Leerink’s Seamus Fernandez said in a report to investors today. The Boston-based analyst now forecasts the drug will garner revenue of $4.2 billion by 2017, writing that it’s “best-in-class” for safety and reducing deaths.

Two Competitors
Pfizer shares traded at the equivalent of $18.45 at 11:30 a.m. Paris time in European trading, 1.3 percent above the Aug. 26 closing price in New York Stock Exchange composite trading. Bristol-Myers rose 1.5 percent to the equivalent of $29.16.

Pfizer and Bristol-Myers trailed two competitors in the race to bring a warfarin replacement to market. Boehringer Ingelheim GmbH’s Pradaxa was the first, approved last year in the U.S. Bayer AG (BAYN) and Johnson & Johnson (JNJ) also have a candidate, Xarelto, due for regulatory review in the U.S. next month.

Until the Paris conference, the two U.S. drugmakers had only compared Eliquis with aspirin. Now cardiologists have results of two large trials showing the drug is safe, a potentially compelling argument, said Lars Wallentin, a cardiologist at Uppsala Clinical Research Center in Sweden who worked on both Eliquis and Pradaxa.

“There is an edge to apixaban, I would admit,” Wallentin said in an interview at the conference.

Fewer Strokes
Irregular heartbeat, or atrial fibrillation, is the biggest part of the market for Eliquis and its competitors. Other smaller groups of patients, such as people who’ve had hip and knee surgery, could generate an additional $3 billion to $6 billion in sales a year, Fernandez said.

Eliquis also prevented 21 percent more strokes than warfarin in the Aristotle study presented yesterday. For every 1,000 patients treated during the trial, it prevented a stroke in six people, major bleeding in 15 people and death in eight people, investigators wrote in a New England Journal of Medicine article published to coincide with the presentation in Paris. Pfizer and Bristol-Myers funded the research, which followed 18,200 patients.

“The answer is crystal clear: patients will do better on this drug,” lead investigator Christopher Granger, of the Duke Clinical Research Institute in Durham, North Carolina, said in an interview at the conference. Lower cost is the only reason for patients to continue taking warfarin, he said.

Blood Tests
Doctors had been eager for a replacement for warfarin because patients need regular blood tests to ensure they’re getting a safe, effective dose of the older drug.

Eliquis was especially impressive because there was evidence it beat warfarin even in patients who were getting the optimal dose, Harvard University cardiologist Elliott Antman said in an interview. Antman is leading studies of another potential competitor, Daiichi Sankyo Co.’s edoxaban.

If a patient is stable on warfarin and doesn’t mind a monthly doctor’s visit for a blood test, there may be no reason to switch to a new, more expensive medicine, Ralph Brindis, senior adviser for cardiovascular disease at Northern California Kaiser Permanente, said in an interview. Warfarin, a generic drug, costs $4 a month, plus about $20 for blood tests, according to a January presentation by the University of Utah Health Care Thrombosis Service.

Atrial fibrillation occurs when the upper chambers of the heart quiver rather than contract, allowing blood to pool and form clots. More than 2.5 million Americans suffer from it, and 11,000 die every year.

Pradaxa, Xarelto
Pradaxa and Xarelto didn’t significantly extend patients’ lives in studies, though both showed a trend toward being able to do so, Jessica Mega, a cardiologist at Brigham and Women’s Hospital in Boston, wrote in an editorial published alongside the results in the journal. Yet all three appear to be better on some measure than warfarin, Mega wrote.

Boehringer’s Pradaxa has the most to lose from good Eliquis results, Larry Biegelsen, a New York-based analyst for Wells Fargo Securities, wrote in a note to clients before the study was published. Bayer’s Xarelto was studied in a more high-risk group of patients than Eliquis or Pradaxa and could maintain a market niche because it’s a once-daily pill, Biegelsen said.

Warfarin is also once-daily. Both Eliquis and Pradaxa must be taken twice each day.

Pfizer and Bristol-Myers plan to submit Eliquis for U.S. and European regulatory approval by year-end.

Bristol-Myers and Pfizer “are two of the best cardiovascular marketers out there,” Leerink’s Fernandez said. “Put this together with the data, and you have a clear winner.”



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Bayer AG (BAYN) rose the most in 10 months in Frankfurt trading after its blood thinner Xarelto won an advisory panel’s support as a treatment to prevent stroke in patients with the most common abnormal heart rhythm.

The drug, known chemically as rivaroxaban, was recommended for atrial fibrillation patients in a 9-2 vote with one abstention by advisers to the Food and Drug Administration meeting yesterday in Adelphi, Maryland. The agency is scheduled to decide whether to approve Xarelto by Nov. 5 and isn’t required to follow the recommendation.

The FDA staff recommended Sept. 6 that the medicine not be cleared for the heart patients because study results didn’t show it would be effective or safe enough. Warfarin, the current standard of care, wasn’t adequately used in a Xarelto study, potentially giving the new treatment from Bayer and partner Johnson & Johnson (JNJ) an unfair advantage, the agency’s staff said in its report.

Xarelto is as effective as “warfarin for patients that really need it,” Philip Sager, an advisory panel member, said. “There are obviously a number of other things that will have to be discussed and worked out.”

Sager is a doctor and a member of the Cardiac Safety Research Consortium in San Francisco.


Earlier Approval
Atrial fibrillation affects more than 2 million Americans, according to the American Heart Association. J&J, based in New Brunswick, New Jersey, markets Xarelto in the U.S. and pays royalties on sales to Bayer, based in Leverkusen, Germany. The German drugmaker sells Xarelto outside the U.S. The partners won U.S. approval July 1 to market the drug for prevention of blood clots after knee or hip replacement surgery.

Physicians for the past half-century have used warfarin, a drug that requires constant monitoring and dose adjustments, to prevent stroke in atrial fibrillation patients, according to the New England Journal of Medicine.

The FDA staff also said the Xarelto results showed excess strokes in patients using the blood thinner who then switched to warfarin. The report suggested the companies conduct a transition trial.

Robert Temple, director of the FDA’s office of drug evaluation, said the panel members differed on what patients would benefit most from the new blood thinner. Several advisers, including Sager, voiced concern that Xarelto should be approved only for patients who don’t respond to other treatments.

‘Pyrrhic Victory’
“The recommendation for approval is potentially a Pyrrhic victory,” Mark Purcell, a London-based analyst for Barclays Capital, wrote in a note to clients today. “The FDA may very well opt for a label that restricts Xarelto to a small part of the market.” Purcell rates Bayer’s shares “equal weight.”

Panel members didn’t support J&J’s claim that Xarelto should be labeled superior to warfarin. Martin Rose, a clinical reviewer with the FDA, said J&J indicated to him that it would no longer pursue a superiority claim as the company sought U.S. approval.

Peter DiBattiste, global therapeutic area head of cardiovascular and metabolism at J&J, disputed Rose’s claim.

“Our position has not changed,” DiBattiste said.

Warfarin’s dose must be maintained in a specific range to keep the blood from clotting and also from getting too thin and putting patients at risk of severe bleeding, particularly brain hemorrhage, Jack Scannell, an analyst with Sanford Bernstein Ltd. in London, said in a note Sept. 7.

Recommended Treatment Range
The comparison group of patients given warfarin during the Xarelto study was in the recommended treatment range just 55 percent of the time. In separate studies of Xarelto’s rivals, the comparison groups on warfarin did better.

Patients remained in the therapeutic window 64 percent of the time during a trial of Boehringer Ingelheim GmbH’s Pradaxa, approved by the FDA for the heart patients in October, and 62 percent of the time for Pfizer Inc. (PFE) and Bristol-Myers Squibb Co. (BMY)’s apixaban, known as Eliquis, now being tested in clinical trials.

The New England Journal of Medicine, which published the results, said Xarelto was tested on higher-risk patients.

The panel discussed the use of warfarin in the Xarelto study at length.

“This can get us into some very dangerous territory,” said Steven Nissen, chairman of the department of cardiovascular medicine at the Cleveland Clinic Foundation. Nissen voted against Xarelto approval.

‘Best-in-Class’
Even if the FDA agrees with the staff report and rejects Xarelto, Scannell said 30 percent of drugs that the agency originally turns away are approved.

A delay in approval may erase any advantage Xarelto might have had by beating Eliquis to the market. Eliquis presented “best-in-class” results Aug. 28 at the European Society of Cardiology’s conference in Paris. The pill had a 31 percent lower risk of major bleeding, a safety concern with blood thinners, compared with warfarin and an 11 percent reduced risk of dying, the first time a warfarin replacement has saved lives in a clinical trial.

About 300,000 patients have been prescribed Pradaxa, Glenn Silver, a spokesman for Boehringer, said in an e-mail.

Bayer said sales of the blood thinner Xarelto will reach at least 2 billion euros ($2.8 billion) a year outside the U.S., leaving its peak sales estimate unchanged even if the drug doesn’t get FDA regulatory approval in atrial fibrillation patients.

The drugmaker is “confident” it will reach the sales target in markets outside the U.S., including Europe and Japan, said Astrid Kranz, a spokeswoman for the company.


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For Russian Prime Minister Vladimir Putin, the U.S. is a “parasite” because its rising debt weighs on the global economy. For his government, the same debt is the safest possible investment.

Russia, the world’s largest energy producer, has boosted its holdings of U.S. debt by more than 1,600 percent since September 2006, according to U.S. Treasury Department data. Russia used surging commodity prices to build the world’s third- largest reserves pile, boosted in part by return on Treasuries.

Putin, 58, who oversaw the largest buildup of U.S. debt holdings in Russia’s history as president from 2000 to 2008, may return to the post after elections next year. The country is now one of the world’s 10 largest holders of the securities with $110 billion at the end of June, about 70 percent more than when Putin left the Kremlin.

“They are sending out a message” largely for domestic consumption, Edwin Gutierrez, who helps manage about $7 billion in emerging-market debt at Aberdeen Asset Management in London, said in a phone interview on Aug. 17. “It’s ironic that these voices of complaint come as they experience massive capital appreciation.”

Russia’s 2020 dollar bonds returned 9.5 percent this year compared with 12.7 percent for similar-maturity U.S. debt. This month, the Russian dollar bonds advanced 0.7 percent against a 5.6 percent increase for U.S. bonds. Ten-year Treasury yields dropped below two percent for the first time yesterday, touching a record-low 1.9735 percent before rising again.

U.S. Bonds Outperform
The yield on 10-year U.S. Treasuries has fallen 2.77 percentage points, or 277 basis points, over the past five years, according to data compiled by Bloomberg. The yield on U.S. Treasuries due in 2016 has fallen 110 basis points this year, almost double the 66 basis-point drop for comparable German bunds.

The American bond market has outperformed world bond indexes since Standard & Poor’s downgraded the U.S. credit rating on Aug. 5, showing market concern that the nation may default hasn’t risen. Moody’s Investors Service and Fitch Ratings, the two next biggest rating companies, affirmed their AAA ratings on the U.S.

S&P’s first downgrade of U.S. debt to AA+ sparked a global selloff in equities as investors sought shelter in traditional havens like Treasuries. The Securities and Exchange Commission is scrutinizing the decision.

‘Beyond Its Means’
The U.S. “is living beyond its means and shifting part of the weight of its problems onto the world economy, acting to some extent as a parasite on the global economy and its dollar monopoly position,” Putin told a youth camp outside Moscow on Aug. 1 in response to questions about the risk of an American default.

After the S&P downgrade, Russia joined the largest holders of U.S. debt in rushing to voice support by pledging to retain their Treasuries holdings.

Russia doesn’t expect “any alternative whatsoever” to American sovereign debt in its holdings for the next five years, Deputy Finance Minister Sergei Storchak said in a telephone interview on Aug. 16.

“The U.S. debt market is still the most liquid, dependable and safe,” Storchak said. “There’s absolutely no reason for Russia to reconsider its position on U.S. securities or to change its investment strategy now. And not just now -- for some time to come.”

Oil Revenue Boost
Even after reducing holdings 38 percent from an October 2010 peak of $176 billion, Russia’s $110 billion in U.S. Treasuries at the end of June accounted for 21 percent of its international reserves and gold holdings, up from 17 percent when the foreign exchange stockpile peaked in August 2008.

Russian holdings of U.S. Treasuries have expanded in the last five years as soaring oil revenue boosted the reserves of the world’s largest crude producer. Urals crude oil, the country’s main export blend, has almost doubled in price to $106.10 a barrel from $54.44 over the same period.

“As long as the dollar remains the main currency in which the central bank tracks reserves and raw-materials companies receive their revenue, Russia really doesn’t have any alternatives,” Oleg Vyugin, chairman at Moscow-based MDM Bank and a former first deputy chairman of the central bank, said in a phone interview Aug. 17. “The Federal Reserve system is the center of global liquidity.”

Russia’s Reserves
Foreign-currency holdings and gold reached $540.2 billion in the week ending Aug. 12, the highest level since October 2008, Bank Rossii said on its website yesterday.

Russia’s holdings of monetary gold rose to a record $43.6 billion as of Aug. 1, from $35.6 billion on Jan. 1 and $27.3 billion a year ago. The country wants to diversify its reserves, Alexei Ulyukayev, a central bank first deputy chairman, said this week in an interview posted on Bank Rossii’s website.

For now, instruments denominated in dollars and euros represent the “two truly liquid markets,” Ulyukayev said. “We’re going to work on this, but unfortunately there’s no reason to expect any significant changes.”

Even as Bank Rossii’s holdings of U.S. debt slipped this year, the country kept the ratio of dollars in its sovereign funds at about 45 percent, said Storchak, who oversees the Reserve Fund and the National Wellbeing Fund. They held a combined $119 billion of Russia’s reserves as of July.

“As opposed to the other central banks, Russia won’t see a need to change the structure of its reserves sharply,” Natalia Orlova and Dmitry Dolgin, analysts at Alfa Bank, Russia’s largest non-state lender, said in a research note on Aug. 17.

Russian oil and gas sales abroad account for about 64 percent of exports, while metals sales are another 15 percent, they wrote. Because most of that revenue is in dollars, Bank Rossii “remain comfortable with a relatively high portion of dollars in its reserves,” Orlova and Dolgin said.


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trysail said:

Russia is rich.



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Putin Calls U.S. ‘Parasite’ as Russia Gobbles Its Debt
By Alena Chechel, Scott Rose and Jack Jordan
Aug 19, 2011

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Bill McKibben and many others have harped repeatedly about "inevitable leaks" from the Keystone XL pipeline being a danger to the Ogallala Aquifer.

This is either rank demagoguery or shocking ignorance. I suspect the former.

The land above the Ogallala Aquifer is already festooned and criss-crossed with many dozens of oil and gas pipelines.

One more will not change the risks already present, which are historically and demonstrably negligible.

Google "pipelines in the United States" and compare the resulting maps of crude oil and natural gas transmission pipelines with the maps of the location of the Ogallala Aquifer.

The dense natural gas pipeline network in western Kansas and the very large crude oil pipelines feeding the refineries in Borger, In the Texas Panhandle, were laid over the Ogallala Aquifer back in the 1940's and 1950's.

In those days the steel was poor, welds were suspect, inspection was minimal, corrosion control was rudimentary and regulation was cursory. Leaks have happened; no one denies that.

The Ogallala Aquifer is located perhaps 400 feet below the surface up in South Dakota, yet rises to no more than 100 feet below the surface at its southern end in West Texas.

Yet despite the density of pipelines in the shallowest part of the aquifer, no contamination has ever taken place.

The reason is simple enough. Leaks of crude oil, if there are any, flash off their light ends and leave their tarry "bottoms" behind, to a consistency of asphalt. To the consistency, by the way, of the bitumen from the Canadian Tar Sands. These heavy bottoms mix with the sand and rock in the pipeline trench, make a composite like road blacktop, and never leave the trench.

I challenge McKibben to identify a physical mechanism by which these mixtures of tar, sand and gravel could burrow down through 100-400 feet of rock to contaminate an aquifer under pressure.

I suspect McKibben already knows that the "aquifer contamination" issue is a red herring.

Click to expand...

• Sunday 9/11/11...............Bicycle 7 miles ( non-stop up Edgevale )............1½ hours
• Monday 9/12/11..............20 minutes@ Level 12 + 5 minutes@ Level 5........3.44 miles ( otherwise full session— 10:30 for 2,000 meters, maximum pulse 151, 163 pounds, elapsed time 1:20 )
• Tuesday 9/13/11.............Two sets of doubles tennis ( 5-7, 6-4, win tiebreaker )
• Wednesday 9/14/11.........Run 1.75 miles, walk 1.48 miles..........................44:20 ( the path through the woods remains an obstacle course thanks to Hurricane Irene, 161 pounds )
• Thursday 9/15/11............Two sets of doubles tennis ( 6-4, 4-6 win tiebreaker )
• Friday 9/16/11................Three sets of doubles tennis (4-4, 4-4, 4-4 )
• Saturday 9/17/11............On the water ( cold )
• Tuesday 9/20/11.............Six sets of doubles tennis ( a total of 4 hours), 15,938 steps or 7.53 miles, out of gas
• Friday 9/23/11................Three sets of doubles (6-2, 5-3, 6-2)
• Saturday 9/24/11............Three sets of doubles (6-1, 6-2, 6-1) 157 pounds ( after cold )
• Monday 9/26/11..............Run 2.25 miles, walk 1.39 miles
• Tuesday 9/27/11.............Five sets of doubles tennis ( 6-2, 6-2, 5-3, 4-6, 6-4 ).........morning and evening, 162 pounds
• Wednesday 9/28/11.........Walk 2.0 miles................................................( upper body session— 9:57 for 2,000 meters, 158 pounds )
• Thursday 9/29/11............Three sets of doubles tennis ( 2-6, 6-4, 0-4 )
• Friday 9/30/11................Three sets of doubles tennis ( 7-1, 5-3, 6-2 ) followed by one set of singles ( 6-4 )
• Sunday 10/2/11...............22 minutes on treadmill....................................2.25 miles ( upper body session— 9:22 for 2,000 meters, 159 pounds )
• Monday 10/3/11..............Walk 4.0 miles
• Tuesday 10/4/11.............Five sets of doubles tennis ( 4-4, 7-1, 6-2, 6-4, 5-7 )
• Wednesday 10/5/11.........Run 3.75 miles................................................161 pounds
• Thursday 10/6/11............Three sets of doubles tennis ( 6-4, 5-7, 6-4)
• Friday 10/7/11................Four sets of doubles tennis ( 2-6, 7-1, 6-2, 5-7 )
• Saturday 10/8/11............Run 3.75 miles................................................161 pounds
• Sunday 10/9/11..............Bicycle 8 miles................................................On the water
• Monday 10/10/11............Run 3.75 miles in 34:05 minutes.........................( upper body session— 10:06 for 2,000 meters, 160 pounds, elapsed time 0:45 )
• Sunday 10/16/11............Bicycle 21 miles
• Monday 10/17/11............Run 3.75 miles................................................161 pounds
• Tuesday 10/18/11...........Two sets of doubles, one set of singles ( 6-1, 6-3, 6-2 )
• Thursday 10/19/11..........Three sets of doubles ( 4-6, 6-2, 4-4 )
• Friday 10/20/11..............Three sets of doubles ( 4-4, 6-2, 6-2 )
• Monday 10/24/11............Run 3.75 miles................................................( upper body session— 9:56 for 2,000 meters, 160 pounds, elapsed time 0:45 )
• Tuesday 10/25/11...........Three sets of doubles
• Wednesday 10/26/11.......Three sets of doubles
• Thursday 10/27/11..........Three sets of doubles
• Friday 10/28/11..............Three sets of doubles
• Sunday 10/30/11.............32:25 minutes on the treadmill..........................3.02 miles ( upper body session— 9:18 for 2,000 meters, 159 pounds, elapsed time 1:10 )
• Tuesday 11/1/11.............Five sets of doubles (3-6, 6-2, 5-7, 6-2, 4-4)
• Wednesday 11/2/11.........Run 3.75 miles ( 58° with sun ).........................( upper body session— 9:30 for 2,000 meters, 159 pounds, elapsed time 0:40 )
• Thursday 11/3/11............Three sets of doubles
• Friday 11/4/11................Three sets of doubles
• Wednesday 11/9/11.........35:00 minutes on Pink Beach Club treadmill...........3.5 miles ( abbreviated upper body session )
• Monday 11/14/11............Run 2.75 miles, walk 1.00 miles in 35:48...............( upper body session— 9:22 for 2,000 meters, 159 pounds, elapsed time 0:45 )
• Tuesday 11/15/11...........Five sets of doubles (6-3, 6-3, 5-7, 1-6, 3-3)
• Thursday 11/17/11..........Three sets of doubles (7-5, 6-3, 6-1 )
• Friday 11/18/11..............Three sets of doubles (8-0, 7-1, 8-0 ) ( I am told that's the first time someone has won 23 games for a perfect "8" on the day )
• Monday 11/21/11............16:33 minutes@ Level 12, 8:27 minutes@ Level 5...3.25 miles ( full session— 9:40 for 2,000 meters, maximum pulse 147, 161 pounds, elapsed time 1:20 )
• Tuesday 11/22/11...........Six sets of doubles (5-3, 6-2, 7-1, 6-3, 6-1, 4-3)
• Wednesday 11/23/11......2:25 minutes@ Level 12, 22:35 minutes@ Level 10...3.26 miles ( full session— 9:40 for 2,000 meters, maximum pulse 133 [undoubtedly wrong], 163 pounds, elapsed time 1:08 )
• Friday 11/25/11..............Three sets of doubles, run 3.75 miles in 31:50........(4-4 {against the professional !}, 6-2, 7-1, that's the best running time I've ever recorded over that course, 160 pounds)
• Saturday 11/26/11..........Three sets of doubles (6-4, 6-2, 6-1 )
• Sunday 11/27/11............Run 3.75 miles ( 69° with sun )............................160 pounds
• Tuesday 11/29/11...........Two sets of singles ( 2-6, 7-6 ) Arghhhh— I'm better than she is and I should have whupped her.
• Thursday 12/1/11...........Three sets of doubles ( 7-5, 6-2, 6-1 )
• Friday 12/2/11................Three sets of doubles ( 1-7, 5-3, 6-2 )
• Sunday 12/4/11..............34:00 minutes on the treadmill.............................3.3 miles (upper body session— 9:36 for 2,000 meters, 160 pounds, elapsed time 1:20 )
• Tuesday 12/6/11.............Three sets of doubles ( 2-6, 5-7, 1-6 )
• Friday 12/9/11................Three sets of doubles ( 5-3, 6-2, 6-2 )
• Sunday 12/11/11.............33:41 minutes on the treadmill.............................2.91 miles ( 160½ pounds )
• Tuesday 12/13/11............Three sets of doubles (2-6, 6-2, 6-2 )
• Wednesday 12/14/11........Run 3.75 miles..................................................( 162 pounds )
• Thursday 12/15/11...........Three sets of doubles (6-3, 6-2, 6-2)
• Friday 12/16/11...............Three sets of doubles (5-3, 5-3, 5-3)
• Tuesday 12/20/11............Two sets of singles (3-6, 5-5 )............................( 163 pounds )
• Wednesday 12/21/11........11:00 minutes@ Level 12, 14:00 minutes@ Level 6...3.19 miles ( full session, 10:08 for 2,000 meters, 161 pounds, elapsed time 1:10 )
• Thursday 12/22/11...........Three sets of doubles (2-6, 6-1, 6-2 )
• Friday 12/23/11...............Three sets of doubles (5-3, 4-4, 8-0 )
• Saturday 12/24/11............Four sets of doubles (6-2, 2-6, 7-5, 6-4 ).............( 160½ pounds )
• Monday 12/26/11.............25 minutes@Level 12..........................................3.43 miles ( full session, 9:42 for 2,000 meters, 163 pounds, maximum pulse 153, elapsed time 1:20 )
• Tuesday 12/27/11............Three sets of doubles (6-2, 0-6, 5-7 )
• Friday 12/30/11...............Three sets of doubles (3-5, 7-1, 8-0 )....................166 pounds
• Saturday 12/31/11...........Three sets of doubles (5-7, 2-6, 2-3 Virginia)...........162 pounds
  .....................................Run 3.75 miles in 33:08 in frustration
• Monday 1/2/12................Three sets of doubles (6-4, 6-3, 3-4 Virginia)...........162 pounds
• Tuesday 1/3/12...............Three sets of doubles (6-4, 6-2, 4-3 )
• Wednesday 1/4/12...........4:00 minutes@ Level 12, 21:00 minutes@ Level 8.......3.31 miles ( full session, 10:00 of rowing {no display}, 162 pounds, maximum pulse 148, elapsed time 1:20 )
• Thursday 1/5/12..............Three sets of doubles ( 2-6, 6-8, 3-2 )....................The pedometer says 5.41 miles in 1½ hours
• Friday 1/6/12..................Three sets of doubles ( 8-0, 4-4, 6-2 )
• Saturday 1/7/12..............26:30 on the treadmill............................................2.64 miles ( 161 pounds )
• Monday 1/9/12................Two sets of singles ( 4-6, 2-6, 1-0 )........................Pathetic, I'm goofing on her
• Tuesday 1/10/12..............Three sets of doubles ( 6-2, 4-4, 6-2 )
• Thursday 1/12/12.............Three sets of doubles ( 6-1, 6-4, 6-0 )....................163 pounds
• Friday 1/13/12.................Three sets of doubles ( 7-1, 8-0, 7-1 )....................163 pounds
• Sunday 1/15/12................32:00 on the treadmill..........................................3.00 miles (upper body session— 9:38 for 2,000 meters, 162 pounds, elapsed time 1:20 )
• Tuesday 1/17/12..............Six sets of doubles ( 6-1, 6-2, 6-2, 5-7, 6-2, 2-3).....163 pounds
• Wednesday 1/18/12..........25 minutes@ Level 12...........................................3.44 miles ( full session, 9:50 for 2,000 meters, 163 pounds, maximum pulse 154, elapsed time 1:20 )
• Friday 1/20/12..................Three sets of doubles ( 6-2, 6-2, 5-3 )
• Monday 1/23/12................Two sets of doubles ( 2-6, 7-5 )
• Monday 2/6/12.................Three sets of doubles ( 3-6, 7-5, 6-0)....................157 pounds
• Tuesday 2/7/12................Three sets of doubles ( 6-3, 6-0, 6-1 )...................12½ minutes@Level 12, 1.60 miles, 159 pounds
• Thursday 2/9/12...............Two sets of doubles ( 6-0, 10-9 )
• Friday 2/10/12..................Three sets of doubles ( 6-2, 2-6, 7-1 )...................159 pounds
• Sunday 2/12/12................33:13 on the treadmill..........................................3.22 miles ( upper body session, 9:40 for 2,000 meters, maximum pulse 155, 5:00 minutes@ Level 12, 0.67 miles, 158 pounds )
• Monday 2/13/12................Three sets of singles ( 6-4, 1-6, 6-0 )....................159 pounds ( I played beautifully and whupped her )
• Tuesday 2/14/12...............Three sets of doubles ( 6-0, 6-4, 6-4 )...................159 pounds
• Wednesday 2/15/12...........25 minutes@Level 12............................................3.35 miles ( full session, 9:50 for 2,000 meters, 159 pounds, maximum pulse 155, elapsed time 1:20 )
• Thursday 2/16/12...............Five sets of doubles (4-6, 8-6, 6-0, 5-7, 4-4 ).........159 pounds
• Friday 2/17/12...................Three sets of doubles ( 4-4, 3-5, 4-4 )
• Saturday 2/18/12...............Four sets of doubles ( 6-1, 6-0, 6-0, 6-0 )..............159 pounds
• Sunday 2/19/12.................15:00 on the treadmill..........................................1.50 miles ( upper body session— 9:40 for 2,000 meters, 157 pounds, elapsed time 1:10 )
• Monday 2/20/12.................Three sets of singles ( 3-6, 2-6, 3-3 )....................I can do better but there's no denying he's a very good tennis player
• Wednesday 2/22/12............Run 3.75 miles in 33:27........................................~60° ( first outdoor run of the year, running shorts, shirt and long sleeve)
• Thursday 2/23/12...............Three sets of doubles ( 6-2, 4-6, 3-3 )
• Friday 2/24/12...................Three sets of doubles ( 7-1, 3-5, 6-2 )
• Sunday 2/26/12.................Two sets of singles ( 6-1, 6-0 ).............................( upper body session, 9:31 for 2,000 meters, 162 pounds )
• Monday 2/27/12.................Run 3.64 miles in 37:00 (rough guess).....................~62° ( they probably didn't name it "stony" without a reason, running shorts, shirt and long sleeves, 161 pounds )
• Tuesday 2/28/12................Three sets of doubles ( 6-1, 6-0, 6-1 )....................162 pounds
• Thursday 3/1/12.................Three sets of doubles ( 6-4, 6-1, 5-1 )
• Friday 3/2/12.....................Three sets of doubles ( 4-4, 6.2, 7-1 )
• Saturday 3/3/12.................Three sets of doubles ( 6-4, 6-0, 6-4 )
• Monday 3/5/12...................Two+ sets of singles ( 2-6, 2-6, 2-2 ).....................161 pounds
• Tuesday 3/6/12..................Five sets of doubles ( 6-2, 6-1, 6-1, 6-0, 6-2 ).........162 pounds
• Thursday 3/8/12.................Five sets of doubles ( 6-1, 6-1, 6-2, 6-3, 6-2 )
• Friday 3/9/12.....................Three sets of doubles ( 3-5, 7-1, 4-4 )
• Sunday 3/11/12..................16 minutes@Level 12............................................2.33 miles ( full session, 9:38 for 2,000 meters, 163 pounds, maximum pulse 151, elapsed time 1:10 )
• Monday 3/12/12..................Run 3.75 miles in 33:23........................................~66°, tee shirt, 162 pounds
• Tuesday 3/13/12.................Three sets of doubles ( 6-1, 6-2, 6-0 )
• Thursday 3/15/12................Three sets of doubles (3-6, 5-7, 2-3 )
• Friday 3/16/12....................Three sets of doubles ( 3-5, 8-0, 2-6 )
• Saturday 3/17/12................Run/walk 3.64 miles
• Sunday 3/18/12..................15 minutes on treadmill.........................................Light upper body session, 163 pounds
• Monday 3/19/12..................Three sets of singles ( 2-6, 3-6, 1-6 )....................just hacking away at the ball, stupid, dreadful, not tennis
• Tuesday 3/20/12.................Six sets of doubles ( 6-1, 6-1, 6-0, 6-2, 4-6, 6-1 )
• Thursday 3/22/12................Two sets of doubles ( 6-3, 8-7 )
• Friday 3/23/12....................Three sets of doubles ( 7-1, 7-1, 2-6 ), two sets of singles ( 6-4, 4-6)....First outdoor game of the year
• Tuesday 3/27/12.................Three sets of doubles ( 6-1, 6-2 , 4-6 )
• Thursday 3/29/12................Three sets of doubles ( 6-1, 6-0, 6-2)...................162 pounds
• Friday 3/30/12....................Three sets of doubles ( 6-2, 5-3, 7-1 )
• Monday 4/2/12....................Three sets of singles ( 6-3, 6-1, 1-6 )....................I really whupped her. What a "head" game! It is just amazing what happens when you actually look at the ball. 163 pounds.
• Wednesday 4/4/12...............Run 3.75 miles in 32:54.......................................162 pounds, 70°
• Thursday 4/5/12..................Three sets of doubles ( 6-1, 6-1, 6-2 )
• Friday 4/6/12......................Three sets of doubles ( 3-5, 7-1, 6-2 )...................Keeerist, they made us play against the damn pro in the first set.
• Saturday 4/7/12..................1 minute@ Level 12, 24 minutes@ Level 6...............3.34 miles ( full session, 9:51 for 2,000 meters, 162 pounds, maximum pulse 153, elapsed time 1:10 ) Goddamn aging, goddamn muscle atrophy.
• Tuesday 4/10/12.................Three sets of doubles ( 6-3, 6-0, 6-0 )
• Wednesday 4/11/12.............17:00 on the treadmill.........................................1.65 miles (upper body session, 9:33 for 2,000 meters, 162 pounds, elapsed time 1:00 )
• Thursday 4/12/12................Three sets of doubles ( 1-6, 8-6, 4-2 )
• Friday 4/13/12....................Three sets of doubles ( 7-1, 2-6, 6-2 )
• Saturday 4/14/12................Run 3.75 miles...................................................162 pounds
• Sunday 4/15/12..................First bicycle ride of the year.................................Short ride in anticipation of singles tennis, nonstop up the hill
• Monday 4/16/12..................Two sets of singles (7-5, 3-6 ).............................In the first set, I ran her ragged in the heat with good ground strokes and concentration. After that, I relaxed and coasted.
• Tuesday 4/17/12.................Five sets of doubles ( 1-6, 6-1, 6-0, 2-6, 4-6 )
• Thursday 4/19/12................Three sets of doubles ( 6-4, 3-6, 3-6 )
• Friday 4/20/12....................Three sets of doubles ( 5-3, 3-5, 5-3 )..................3.69 miles @ 3.0'/step = 6,523 steps
• Saturday 4/21/12................Three sets of doubles ( 3-6, 6-1, 6-2 )..................walk 2.9 miles to calibrate pedometer @ 2' 11"/stride, 162 pounds
• Tuesday 4/24/12.................25 minutes@ Level 12.........................................3.36 miles ( full session, 9:43 for 2,000 meters, 165 pounds, maximum pulse 150, elapsed time 1:15 )
• Thursday 4/26/12.................Three sets of doubles ( 1-6, 5-7, 3-3 )
• Friday 4/27/12.....................Three sets of doubles ( 3-5, 6-2, 7-1 )
• Saturday 4/28/12.................Three sets of doubles ( 6-4, 6-0, 6-1 )
• Monday 4/30/12...................Three sets of singles ( 3-6, 2-6, 4-6 )..................2½ hours
• Tuesday 5/1/12....................Three sets of doubles ( 6-2, 6-1, 6-0 )
• Thursday 5/3/12...................Two sets of doubles ( 6-2, 6-7 )
• Friday 5/4/12.......................Run 3.75 miles.................................................163 pounds
• Monday 5/7/12.....................Walk 3.85 miles................................................1.00 mile on treadmill ( upper body session, 9:31 for 2,000 meters, 162½ pounds, elapsed time 0:46 )
• Tuesday 5/8/12....................Two sets of doubles ( 6-0, 6-4 )
  .........................................Two sets of singles ( 6-2, 7-5, 2-1 )....................Virginia— the ball looked like a watermelon, everything worked, I even hit backhand winners!
• Thursday 5/10/12..................Two sets of singles ( 5-7, 2-1 )..........................Greg— no comment
• Saturday 5/12/12..................Run 2 miles....................................................."Fun Run"
• Monday 5/21/12........................................................................................Light upper body session
• Tuesday 5/22/12...................Run 3.85 miles.................................................162 pounds
• Thursday 5/24/12..................Run 3.85 miles
• Saturday 5/26/12..................Run 2.25 miles..................................................First swim of the year 84°
• Sunday 5/27/12....................Bicycle 12 miles................................................½ hour swim
• Monday 5/28/12....................One set of doubles, two sets of singles ( 3-6, 1-5, 6-0 )
• Tuesday 5/29/12...................Run 3.85 miles.................................................½ hour swim, 162 pounds
• Sunday 6/3/12......................Walk 6.6 miles
• Monday 6/4/12.....................Two sets of singles (0-6, 6-5 )............................Greg
• Tuesday 6/5/12....................15 minutes on treadmill.......................................1.30 miles, 163 pounds
• Wednesday 6/6/12.................Walk 4.9 miles
• Thursday 6/7/12....................Run 3.85 miles..................................................½ hour swim, 162 pounds
• Saturday 6/9/12....................Run 2.25 miles, walk 2.6 miles, ½ hour swim
• Monday 6/11/12....................Bicycle 21.0 miles, two sets of doubles (6-1, 6-4)......162 pounds
• Tuesday 6/19/12...................Two sets of singles (2-6, 3-6).............................Greg, run 2.25 miles, walk 1.6 miles
• Friday 6/22/12......................Two sets of doubles ( 4-6, 2-6 )
• Saturday 6/23/12..................Three sets of doubles ( 6-0, 6-0, 6-2 )
• Sunday 6/24/12....................Bicycle × miles, ½ hour swim
• Monday 6/25/12....................Run 3.85 miles
• Tuesday 6/26/12...................Bicycle 21.1 miles, ½ hour swim
• Monday 7/2/12.....................Two sets of doubles in 96° ( 6-1, 6-4)
• Tuesday 7/3/12....................Two sets of singles ( 3-6, 3-3 )............................Greg
• Wednesday 7/4/12................Three sets of doubles (6-2, 6-1, 6-2)....................Tom, Buck, Charlie
• Friday 7/6/12........................Run 2.32 miles...................................................96°, ½ hour swim
• Saturday 7/7/12...................Walk 3.87 miles...................................................95°, ½ hour swim
• Monday 7/9/12.....................Three sets of doubles (6-0, 3-6, 6-0).....................Rick, John, Charlie
• Tuesday 7/10/12...................Run 3.87 miles, ½ hour swim
• Friday 7/13/12......................Run 3.87 miles, ½ hour swim
• Monday 7/16/12....................Bicycle 21 miles, ½ hour swim
• Tuesday 7/17/12...................Run 2.87 miles, walk 1.00 miles, ½ hour swim...........98°
• Wednesday 7/18/12...............Three sets of doubles ( 3-5, 6-2, 6-2 )
• Thursday 7/20/12..................Run 3.87 miles, ½ hour swim
• Sunday 7/22/12....................Bicycle 11.8 miles
• Monday 7/23/12....................Run 7.0 miles, bicycle 12.8 miles (mountain bike).......92°, 60% humidity, roughly 1:10
• Wednesday 7/25/12...............Run 7.0 miles......................................................roughly 1:10
• Friday 7/27/12......................Run 2½ miles, walk 5½ miles.................................94°, 70% humidity
• Sunday 7/29/12....................Bicycle 9 miles, ½ hour swim
• Monday 7/30/12....................Run 3.87 miles
• Wednesday 8/1/12................Three sets of doubles ( 2-6, 6-3, 4-6 )
• Thursday 8/2/12....................Bicycle 21 miles, ½ hour swim
• Friday 8/3/12........................Two sets of doubles ( 2-6, 3-6 ), ½ hour swim
• Tuesday 8/7/12.....................Three sets of singles (2-6, 2-6, 0-6 ).....................dreadful, one of us was playing tennis— it wasn't me
• Thursday 8/9/12....................Bicycle 21 miles, ½ hour swim
• Friday 8/10/12.......................Two sets of doubles ( 6-3, 6-0 ), ½ hour swim
• Sunday 8/12/12.....................Run 2.0 miles, walk 1.9 miles, ½ hour swim
• Monday 8/13/12.....................Bicycle 21 miles
• Wednesday 8/15/12................Doubles ( 10-10, 8-6 ), ½ hour swim
• Friday 8/17/12.......................Seven sets of doubles ( 7-1, 5-3, 6-2, 6-0, 6-2, 2-6, 3-6)
• Monday 8/20/12.....................Two sets of doubles ( 4-6, 2-6 ), ½ hour swim
• Tuesday 8/21/12....................Bicycle 21 miles, ½ hour swim
• Wednesday 8/22/12................Three sets of doubles ( 6-2, 6-3, 6-3 ), ½ hour swim
• Thursday 8/23/12...................Bicycle 50.8 miles in 6:15 (4:55 actual bike time) averaging 8.13 MPH overall and 10.33 MPH on the bike, ½ hour swim
• Saturday 8/25/12...................Run 3.87 miles, ½ hour swim
• Monday 8/27/12.....................Three sets of doubles ( 2-6, 6-3, 7-5 ), hour swim
• Tuesday 8/28/12....................Run 2.7 miles, walk 1.0 miles, ½ hour swim
• Wednesday 8/29/12................Three sets of doubles ( 6-2, 6-4, 6-2), ½ hour swim
• Thursday 8/30/12...................Bicycle 21 miles, two sets of doubles ( 6-2, 7-6 tiebreaker), ½ hour swim
• Saturday 9/1/12.....................Run 3.85 miles, ½ hour swim
• Monday 9/3/12.......................Three sets of doubles ( 6-2, 3-5, 6-2)
• Tuesday 9/4/12......................Three sets of doubles ( 6-2, 7-5, 6-1)
• Wednesday 9/5/12..................Three sets of doubles ( 6-2, 7-5, 6-2)
• Thursday 9/6/12.....................Walk 1 mile, run 2.85 miles...................................160½ pounds
• Friday 9/7/12..........................Three sets of doubles ( 6-2, 3-5, 6-2)
• Saturday 9/8/12.......................½ hour rally
• Sunday 9/9/12.........................Bicycle 6 miles, hour rally
• Monday 9/10/12.......................Three sets of doubles ( 6-4, 3-6, 4-6)
• Tuesday 9/11/12......................Three sets of doubles ( 6-2, 6-4, 6-1)
• Wednesday 9/12/12..................Run 3.8 miles in 33:12.......................................( upper body session, 9:43 for 2,000 meters, 160 pounds, elapsed time 0:50 )

Jack Bogle, founder of the Vanguard Group, launched the first index fund 35 years ago on Aug. 31, 1976, with $11.4 million in assets. His fund took the then-radical step of holding all the equities that made up an index such as the Standard & Poor's 500, rather than paying a manager to pick stocks. Also radical: The fund charged a quarter of the fees of a typical actively managed mutual fund.

Index-based assets in U.S. mutual funds and exchange-traded funds now total $1.9 trillion, according to the Investment Company Institute. Some $900 billion of that is at Vanguard.

Bogle, 82, retired as Vanguard's chief executive officer in 1996. As head of Vanguard’s Bogle Financial Markets Research Center, he continues to speak and write in his usual no-holds-barred style on the benefits of indexing, the rate of return investors can expect from stocks and bonds, and the state of the mutual fund industry.

1. What investments are particularly overvalued?

Gold is probably particularly overvalued. Here's this totally speculative so-called investment, which has no internal rate of return. Stocks have earnings growth and dividend yields, and bonds have interest coupons. Gold has nothing except somebody's opinion. But in this kind of environment, it may take years, or maybe even decades, to get back to a reasonable level. When will speculators stop speculating? I don't think anyone knows the answer to that.

2. Do any investment categories look undervalued?

I don’t think anything is seriously undervalued. Stocks are fairly valued and should probably give a better return than bonds. Over the next decade, bonds, based on today's spectrum of yields, should give a return of about 3.5 percent per year. Stocks have a 2.25 percent dividend yield and their earnings should grow at least 5 percent. So that would be a 7 percent or 7.5 percent investment return, assuming no change in the price-earnings multiple. In a decade, at 3.5 percent per year, your bond assets will grow about 50 percent, and at 7.5 percent your stocks will grow 100 percent.

3. What trend in the fund industry troubles you?

It’s this growing speculative fever that affects even the mutual fund industry. Shareholders are holding their mutual funds for three years on average. That’s absurd. And the funds themselves are holding the average stock for about one year. That’s equally absurd. The fund industry has turned into a marketing business, and the important thing is getting a lot of assets under management. It’s run for the benefit of financial conglomerates that own most of the large mutual fund management companies.

4. Is this the worst investment environment you've seen in your lifetime?

Oh my goodness, no, not at all. I’ve been in this business for 60 years. So I’ve seen 50 percent declines in 1973-4, in 2000-3, and in 2007-9. This decline is not nearly that much. Could this get to be 50 percent? I doubt it, but I don’t know. The best investment advice I ever got came when I was a runner for a brokerage firm when I was in college. One of the other runners said: “Nobody knows nothing.” And of course that’s true. It’s not given to us to know. The future is not ours to see. You try to make intelligent decisions, have an intelligent plan that balances risk and reward, balances stocks and bonds, and ignore the noise in the market.

5. It seems there is a lot of hopelessness about peoples' investment options. How would you describe the current situation?

This is not a particularly cheap market to invest in. But, the problem is that we must invest. We can’t stand back. If you don’t save anything, I guarantee you will end up with absolutely nothing. There’s no such thing as a bad market. If the market goes way down, that’s good for buyers and bad for sellers. We’ve let the emotions—the excitement of the short term—take over our thinking about [our goals]—basically a long-term plan to fund retirement. Maybe not today, but over the long run stocks are going to be the best way to get there.


http://www.bloomberg.com/news/2011-...r-jack-bogle-vanguard-index-fund-pioneer.html

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WIMBLEDON, England — The top three men’s players in the world tennis rankings — Rafael Nadal, Novak Djokovic and Roger Federer — each possesses a distinct style and, more surprisingly, a distinct racket.

“If you give Nadal’s racket to Federer, I think he would struggle, and I think going the other way would be even a lot harder,” said Roman Prokes, one of the leading racket customizers who has worked for the United States Davis Cup team and many top players. “I really think Federer is one of those guys who can adjust the easiest to anything you give him, but Nadal’s game, if you gave him Federer’s racket, I think it would not be pretty.”

Federer’s racket is the heaviest of the three, a little more than 12 ounces, and it has the thinnest beam, the sharpest edges and the smallest head, which is a source of growing debate within the sport.

Nadal’s racket is the lightest and has the smallest grip, along with a wide, rounded throat designed with the aerodynamics of his whipping forehand in mind.

Djokovic’s racket has the densest string pattern to suit his counterpunching, flatter-hitting style, and Djokovic also has his rackets strung the tightest.

“I think for professional-level players, Nadal’s racket probably represents one end of a spectrum and maybe Roger’s is the other end, and I would say Novak’s racket is sort of in the middle there somewhere,” said Cory Springer, the global business director for rackets at Wilson.

Wilson, whose long-running relationship with Federer dates to his junior days, makes Federer’s Six.One Tour BLX.

Babolat, a French company once known for its strings, not its rackets, makes Nadal’s Aeropro Drive GT.

Head lured Djokovic from Wilson with a major deal in 2009 and now makes his YouTek Speed MP. Such racket switches often backfire, but Djokovic, after some early concerns, has clearly adjusted. His record in 2011 is 42-1.

“One thing’s for sure: if you went to my shop and pulled the Head off the rack, the Babolat off the rack and the Wilson off the rack, and then got a hold of those three guys’ actual rackets, they won’t feel like the three that just came off the rack,” said Brad Gilbert, a coach and ESPN television commentator. “Those guys — their grips are molded to their hand, and the racket is weighted and balanced, and it’s customized.”

Federer said he had lobbied to close the gap between the store model and the racket he uses in competition. “I wanted Wilson to actually make it as close as possible,” he said in an interview.

But he and Djokovic, like many leading players, still hire a racket-servicing outfit called Priority One, which adjusts their frames and handles their stringing needs. Nadal, generally considered the least particular of the three, often relies on the tournament staff to string his rackets and on Babolat’s technicians to prepare them.

But even with models that are not customized, the differences between the frames are clear. Last week, a small group of play testers of varying skill levels used rackets provided by the manufacturers that were strung relatively close to the players’ general specifications. Among the conclusions arrived at by consensus:

¶ Nadal’s racket seemed the easiest to generate topspin with from the baseline, but was more challenging to master on touch shots closer to the net.

¶ Djokovic’s racket felt quickest through the air, particularly on the serve.

¶ Federer’s racket seemed the least forgiving on off-center hits but provided exceptional feel when contact was made with the sweet spot.

In the industry, Federer’s racket is generally considered the most challenging to handle, above all for the recreational set.

“I have a tennis shop,” Gilbert said, “and I tell people all the time, we don’t even carry that stick anymore because it’s just not a good racket for a club player. You’ve got to hit flush, I mean flush.”

Its 90-square-inch head is the smallest in use by a leading player. Nadal’s and Djokovic’s rackets have 100-square-inch heads. Federer, like Pete Sampras before him, has been hearing suggestions that he switch to a larger head to cut down on mis-hits.

“I’ve tried bigger,” Federer said. “The problem is we don’t have enough time to do racket testing, you know? I’m always talking to Wilson about: ‘What else do you have? What else can we test?’ And who knows? Maybe down the road, I’ll change again.”

The other issue is psychological: Federer has won 16 Grand Slam singles titles and just reached the French Open final. “It’s also hard to change with all the success I’ve had with the racket,” he said.

The technology race remains a hallmark of the business. The latest iteration of Djokovic’s racket, a version he began using in January, includes a material called Innegra, which is new to tennis but which has been used in the design of custom surfboards. Head claims it extends the life of graphite and significantly reduces vibration.

But the strings are where the real breakthroughs have come in the past decade. The development of polyester strings has changed the game by allowing players to take bigger cuts without bigger risks. Nadal switched to a new type of Babolat co-poly string called RPM Blast in January 2010 designed to help improve spin.

Federer and Djokovic use a blend of polyester strings and natural gut. They use gut in their main, vertical strings and polyester in their cross strings, the opposite of what most players do.

“When Roger went this way and started racking up Slams, there was a period when everybody started switching and then they all went back,” Wilson’s Ron Rocchi said. “The theory is that you put poly in the mains to get durability, and gut in the crosses helps playability. But Roger was stringing rackets so often anyway, he didn’t care about durability. He went for a different feel on the string bed, and it comes from the fact he is stringing a very small head size at a very low tension.”

Federer, unlike Nadal, regularly adjusts his string tensions to playing conditions. But according to Rocchi, Federer favors a tension of 49.5 pounds in the main and 46.2 in the crosses. Nadal’s tension is, according to Prokes, usually at about 55 pounds for all his strings. Djokovic’s string tension is the tightest of the top three, generally 59.5 to 61.7 pounds, and he is also the only one to use an 18-20 string pattern (18 mains, 20 crosses). Nadal and Federer both use more open, 16-19 patterns.

“With more open string patterns, the theory is that you can generate more spin but it’s harder to control the ball,” Prokes said. “With 18 by 20, you can still hit flat and have tremendous control on the ball, so Djokovic uses 18 by 20 because he’s like a counterpuncher. He can still generate spin, just not huge spin. For him, it makes a lot of sense.”

But Nadal wants huge spin, and his racket is designed to give it to him and to others who use it, like the Italian star Francesca Schiavone.

“These are not linear players,” said Jean-Christophe Verborg, Babolat’s international tour director. “That’s why the racket needs to move differently through the air.”

It also apparently moves differently off the racks. According to Prokes and other industry sources, the Aeropro Drive GT is the biggest seller of the rackets used by the top three men.


http://www.nytimes.com/2011/06/20/sports/tennis/20iht-SRWIRACKET20.html?_r=2&pagewanted=all

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Anyone who puts even minimal elbow grease into retirement planning is well aware of "the number," the anxiety-producing seven-figure sum online calculators and financial advisers say you'll need to enjoy a comfortable lifestyle after your career ends. There's a far smaller number that deserves more attention now -- the rate of return at the heart of that calculation.

According to Ibbotson data, the long-term annualized gain for the Standard & Poor's 500-stock index dating back to 1926 is 9.9 percent. For bonds, it's 5.4 percent. (From 1970 to 2010, the Barclays Capital Aggregate Bond index average was 8.3 percent.) Plug those numbers into a portfolio of 60 percent stocks and 40 percent bonds and the return is about 8 percent, which is precisely the number most financial planners -- and retirement calculators -- were using up until recently.

With bond yields at record lows and stock dividend yields less than half their long-term norm, however, expecting portfolios to deliver returns in line with those historical averages may be a dangerous assumption. Using lower return numbers and seeing a higher savings target emerge may be a harsh reality check, but better to grapple with it now than be shocked when there's less time to ramp up savings or cut spending to remedy a shortfall.

Today many advisers are looking out a decade or so and lowering the rate of return they expect from stocks and bonds. Jon West, a director at Research Affiliates, which manages $50 billion, says the firm's number crunching leads it to estimate that stocks could deliver 5 percent to 6 percent, and bonds 2 percent or so. That's based on getting "at least 2 percent less from dividends," anemic earnings growth, and no growth in the stock market's price-earnings ratio, he says. It produces a return below 5 percent for a 60/40 portfolio. That's a far cry from 8 percent.

Vanguard founder Jack Bogle has a slightly more upbeat assessment. He expects stock returns of 7 percent to 7.5 percent over the next decade. He assumes no expansion in the market's price-earnings ratio, dividend yields of 2.2 percent, and earnings growth of at least 5 percent. Bogle expects bond returns to be about 3 percent. For a balanced portfolio, that produces a net nominal return of slightly more than 6 percent. A higher forecast is T. Rowe Price's estimate of 7 percent; until this year it had used 8 percent.

Not-So-Happy Returns
Lower return expectations are a function of pretty straightforward math. Dividend income has historically played a large role in stocks' total return. Dating back nearly 100 years, dividends have contributed slightly less than half (4.5 percentage points, to be exact) of the S&P 500's 9.9 percent annualized total return. And since 1995 dividends have practically gone into witness protection, averaging about 2 percent.

The challenge for bond investors is today's low yields. A bond's total return comprises yield plus any changes in the underlying price of the bond. Bond prices rise when yields fall, and with the 10-year Treasury at a record low and the Barclays Capital Aggregate Bond index below 3 percent, there's little room for prices to rise. So figure an annualized return below 3 percent for bonds over the next decade, says West.

More sober return realities aren't reflected in all of the online retirement calculators. Some, such as ones offered by Principal Group and Yahoo! Finance, use 8 percent as the default rate. Others, including the AARP and Bloomberg calculators, default to 6 percent. The Labor Dept.'s calculator plugs in 5 percent. Vanguard's gives savers a slider to play with that's initially set at 5 percent. It labels 5 percent "conservative" and describes a return anywhere from 6 percent to 9 percent as "moderate." That's a mighty wide range.

Vanguard senior investment analyst Maria Bruno says the range gives users “flexibility” and is based on the different outcomes investors have experienced historically depending on whether they held only stocks, only bonds or combinations of the two. Because these are based on long-term data, “we don’t modify ranges like this in different types of market conditions,” she says.

Principal says in an e-mail that its 8 percent figure is based on a 10 to 30 year view of the market "which we believe is appropriate for long-term retirement savings." When contacted, Yahoo Finance said it is reviewing the rates used on the site's personal finance calculators.

Going to Monte Carlo
Online retirement calculators may also rely on what's known as Monte Carlo simulations. Rather than choose one rate of return to base calculations on, Monte Carlo incorporates thousands of return scenarios that deviate from assumed benchmark rates of return based on different volatility scenarios, as well as assumed withdrawal scenarios for retirees. After the program runs the numbers, it gives a "success rate" showing the percentage of market scenarios where a saver arrived at the end of his life span and still had money. There are free calculators using Monte Carlo simulations at T. Rowe Price, Fidelity, and Schwab.

Monte Carlo simulations are useful but can have shortcomings. William Bernstein, a principal at Efficient Frontier Advisors and author of "The Investor's Manifesto," worries they can give a false sense of security since, for the most part, they assume normally distributed returns -- not the dramatic market meltdowns of recent years. Fidelity's calculator shows savers two probabilities: one that assumes the historical rates of return are borne out, and another shows how savers would fare if they had below-average outcomes.

If using any of the calculations shows that a savings goal needs to be hiked, one way to eke more return out of a portfolio is to focus on fees. Forking over 1 percent to 1.5 percent of your money each year to cover a mutual fund's expense ratio may have been easy to overlook in the 1990s when the S&P 500's annualized return was 18.2 percent. If returns are 6 percent or 7 percent over the next decade, a 1.5 percent expense ratio cuts a net return by about 25 percent.

"In this day and age, there's simply no excuse for paying [an expense ratio of] more than 0.25 percent for a portfolio of U.S. stocks and bonds, and maybe 0.5 percent for a portfolio of foreign stocks," says Bernstein.



http://www.bloomberg.com/news/2011-10-03/that-retirement-calculator-may-be-lying-to-you.html

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...S&P Indices does not make any adjustment to earnings for Credit Valuation Adjustments (CVA), such as was reported by Citigroup, or Debit Valuation Adjustments (DVA), such as those reported by Bank of America, J P Morgan Chase, and Morgan Stanley. Both valuation adjustments are typical to operations of making loans or dealing in securities and as such are at risk and cost of doing business in their industry, and are therefore considered part of their regular operations. S&P Indices will continue to review earnings data, utilizing public releases and S.E.C. filings to insure proper treatment.

Note that these amounts (US$ pre-tax $1.7B for BAC, $1.9B for C, $1.9B for JPM, and $3.4B for MS) will increase the variance between earnings and cash-flow for the third quarter. Both earnings (Operating and As Reported) and cash-flow set a record for the second quarter, with the current third quarter earnings estimated to come in slightly lower than the second quarter, but still placing itself as the second highest earnings in history. To date there have been few items declared or pre-announced which should significantly decrease cash-flow, however, reporting is still young.

COMMENTARY: CONSISTENCY IN REPORTING IS PARAMONT
Henry Ford may have been able to produce only black cars at one time but that didn’t last long. At one point in time there were earnings – not Operating, not As Reported, not Core, not Normalized, not EBITDA, or anything else, just earnings. Those days are gone.

***​

The reason for this note is the use by several large financial houses, such as Back of America, Citigroup, and J P Morgan Chase, to utilize a Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA), which in their case has added a few US$ Billion to their net income. These are legitimate entries, and these companies have released full documents on the item. At S&P Indices we include these items in the As Reported GAAP earnings, because that is the requirement as set forth by GAAP; we are not, nor do we wish to be, the accountant. Both valuation adjustments are typical to operations of making loans or dealing in securities and as such are at risk and cost of doing business in their industry, and are therefore considered part of their regular operations. Therefore, S&P Indices also makes no adjustment to earnings for these items in Operating earnings. S&P Indices will continue to review earnings data, utilizing public releases and S.E.C. filings to insure proper treatment.

While companies may properly argue for inclusion of certain ‘positive’ items, they more commonly argue to exclude certain cost or charge items, we look to our rule based determinant, which is principle based. The question of what is and is not normal or part of a typical ongoing operation is extremely complex, which is why we strive to adhere to methodology. Consistency with methodological transparency gives investors the knowledge to make informed decisions. S&P Indices realizes that some analysts may take our number and vary from it. Personally, I not only accept that, but appreciate it. The starting line for the S&P 500 earnings number is S&P Indices. Similar to the index, it is a know methodology, to which S&P Indices endures painstaking procedures to insure that the earnings are compatible to the index membership, and to the price. The result is a value compatible across industry lines. Individual analysts and investors may, and in some cases should, stray from the starting point. But knowing what you start with is key.

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The biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that’s happened since before the Civil War.

Fixed-income investments advanced 6.25 percent, almost triple the 2.18 percent rise in the Standard & Poor’s 500 Index through last week, according to Bank of America Merrill Lynch indexes. Debt markets are on track to return 7.63 percent this year, the most since 2002, the data show. Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago.

The combination of a core U.S. inflation rate that has averaged 1.5 percent this year, the Federal Reserve’s decision to keep its target interest rate for overnight loans between banks near zero through 2013, slower economic growth and the highest savings rate since the global credit crisis have made bonds the best assets to own this year. Not only have bonds knocked stocks from their perch as the dominant long-term investment, their returns proved everyone from Bill Gross to Meredith Whitney and Nassim Nicholas Taleb wrong.

“The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong,” Bianco said in an Oct. 26 telephone interview. “It’s such an ingrained idea in everyone’s head that such low yields should be shunned in favor of stocks, that no one wants to disrupt the idea, never mind the fact that it has been off.”

Market Returns
Stocks had risen more than bonds over every 30-year period from 1861 until now, according to Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia.

U.S. government debt is up 7.23 percent this year, according to Bank of America Merrill Lynch’s U.S Master Treasury index. Municipal securities have returned 8.17 percent, corporate notes have gained 6.24 percent and mortgage bonds have risen 5.11 percent. The S&P GSCI index of 24 commodities has returned 0.25 percent.

Falling Yields
While 10-year Treasury yields rose 10 basis points, or 0.10 percentage point, last week to 2.32 percent, they are down from this year’s high of 3.77 percent on Feb. 9. The price of the benchmark 2.125 percent note due August 2021 fell 27/32, or $8.44 per $1,000 face value, in the five days ended Oct. 28 to 98 10/32, according to Bloomberg Bond Trader data.

The yield dropped six basis points today to 2.25 percent at 7:22 a.m. in New York.

The shift to debt wasn’t anticipated by Gross, who as co- chief investment officer of Newport Beach, California-based Pacific Investment Management Co. runs the world’s biggest bond fund. His $242 billion Total Return Fund, which unloaded Treasuries in February before the rally, has gained 2.55 percent this year, putting it in the bottom 18th percentile of similar funds, according to data compiled by Bloomberg.

Whitney, a banking analyst who correctly turned bearish on Citigroup Inc. in 2007, predicted in December “hundreds of billions of dollars” of municipal defaults that haven’t happened. Taleb, author of “The Black Swan” and a principal at Universa Investments LP, said at a conference in Moscow on Feb. 3 that the “first thing” investors should avoid is Treasuries.

What Went Wrong
The reluctance to purchase debt continues. Leon Cooperman, chairman of $3.5 billion hedge fund Omega Advisors Inc., said in a presentation at the Value Investing Congress in New York on Oct. 18 that he “wouldn’t be caught dead owning a U.S. government bond.”

What the bears failed to anticipate was that Americans would continue to pare debt and boost savings. Much of that money found its way into the fixed-income markets as banks and investors sought high-quality debt as unemployment held at or above 9 percent every month except for two since May 2009, Europe’s fiscal crisis threatened to push the global economy back into recession and stock markets fell.

“It’s hard to envision a scenario where we see significantly better than two percent growth, with increased fiscal austerity and headwinds from the leverage bubble and persistent unemployment,” said Rick Rieder, who oversees $620 billion as chief investment officer of fundamental fixed income at New York-based Blackrock Inc. The firm is the world’s largest money manager, investing $3.45 trillion.

Higher Savings
The U.S. savings rate has tripled to 3.6 percent since 2005 and has averaged 5.1 percent since the depth of the financial crisis in December 2008, compared with 3.1 percent for the previous 10 years, according to government data. Debt mutual funds have attracted $789.4 billion since 2008, compared with a $341 billion drop in equity funds, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.

Banks, still trying to rebuild their balance sheets after taking more than $2 trillion in writedowns and losses since the start of 2007, have boosted holdings of Treasuries and government-backed mortgage securities to $1.68 trillion from $1.62 trillion in December, according to the Fed. Foreign investors increased their stake in Treasuries to $4.57 trillion in August from $4.44 trillion at the end of 2010, according to the latest Treasury Department data.

The bond market posted its first 30-year gain over the stock market in more than a century during the period ended Sept. 30. The last time was in 1861, leading into the Civil War, when the U.S was moving from farm to factory, according to Siegel, author of the 1994 book “Stocks for the Long Run,” in a telephone interview Oct. 25.

‘Millennium Event’
“The rally in bonds is a once in a millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform,” he said. “If you missed the rally in bonds, well, then that’s it.”

Gross eliminated Treasuries from the Total Return Fund in February and owned derivative bets against the debt in March. He moved 16 percent of its assets into U.S. government securities as of September, saying earlier this month in a note to clients that he misjudged the extent of the economic slowdown and called his performance this year “a stinker.”

Local government bonds are set for the biggest gains since 2009 as defaults fell last quarter. Cities and states are reducing expenses instead of forgoing payments on debt even as they confront fiscal strains in the wake of falling revenue.

One Miss
Whitney said on the CBS’s “60 Minutes” in December that there would be “hundreds of billions of dollars” of municipal defaults this year. Brighton, Alabama, a city of 2,945 near Birmingham, was the only U.S. municipality to miss a general- obligation debt payment in 2011. Defaults are about 25 percent of 2010’s $4.3 billion tally, according to Bank of America Corp.

Money has poured into Treasuries even as U.S. budget deficits totaled $1.4 trillion in fiscal 2009 ended Sept. 30, $1.29 trillion in 2010 and $1.3 trillion in 2011.

Rising deficits and debt led Taleb, the distinguished professor of risk engineering at New York University, to tell investors in February that the “first thing” they should do is avoid Treasuries, and the second shun the dollar. At the same conference a year earlier he said “every single human being” should bet against U.S. government debt.

Tame Inflation
Since February Treasuries have rallied 7.99 percent and the currency has gained 3.2 percent, beating 14 of its 16 most actively traded peers, according to Bank of America Merrill Lynch indexes and data compiled by Bloomberg.

Concerns about inflation have also abated. Consumer prices, excluding food and energy, rose 0.05 percent in September, the smallest gain since October 2010, the Labor Department said Oct. 19 in Washington. Yields on bonds that protect investors from rising consumer prices suggest the fixed-income market anticipates inflation will average to 2.15 percent over the next decade, down from expectations of 2.67 percent in April.

“The Fed is legally obligated to do everything in their power to keep unemployment low, and they have and will continue to do so,” said Chris Low, chief economist at FTN Financial in New York. “As long as inflation isn’t a concern the Fed is going to keep firing until something happens,” Low said in a telephone interview Oct. 21.

Low was one of three economists in a Bloomberg survey of 72 forecasters in January to predict that 10-year Treasury yields would trade below 3 percent this quarter.

Fed Signals
Fed policy makers, who meet this week, have signaled that they are considering more measures to boost the economy, after holding the target rate for overnight loans between banks at zero to 0.25 percent since December 2008 and expanding its balance sheet to a record $2.88 trillion.

Vice Chairman Janet Yellen said Oct. 21 that a third round of large-scale securities purchases might become warranted. Last month, policy makers said they would replace $400 billion of short-term debt with longer-term Treasuries in an effort to contain borrowing costs.

“The Fed’s hope is that by pushing down Treasury rates, all other rates will follow,” Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee, said in a telephone interview Oct. 26.

“As a portfolio manager who has been in the business 30 years, it’s hard to come to terms where interest rates are, but you have to come to terms with it,” Mark MacQueen, who oversees bond investments at Austin, Texas-based Sage Advisory Services Ltd., which manages $9.5 billion, said in an Oct. 26 telephone interview. “And when you look at what stocks have done this decade it becomes much easier.”


http://www.bloomberg.com/news/2011-...-years-for-first-time-since-19th-century.html

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Thirteen years ago, when the hedge fund Long-Term Capital Management was desperately negotiating with Wall Street banks for a bailout, Jon Corzine, the chief executive officer of Goldman Sachs Group Inc., called John Meriwether, LTCM’s founder, and read him the riot act. Wall Street would invest, Corzine said, but “JM” would have to accept more controls, including strict supervision over his firm’s trading limits.

Corzine, I wrote soon after, “understood the flaws” at LTCM better than anyone. The firm had no controls over risk limits, no accountability to anyone who wasn’t a trader.

Corzine was also tempted by the upside of high-risk trading -- and by Meriwether in particular. Perhaps his admiration for Meriwether didn’t begin when they were classmates at the University of Chicago Booth School of Business, in the early 1970s, but it blossomed soon after, when Corzine became a bond trader at Goldman and Meriwether one at Salomon Brothers.

Goldman, in that era, was still a firm guided by investment bankers, sometimes in tandem with traders but always with the motto “long-term greedy” rather than short-term. Its primary mission was doing deals for clients. Since Goldman was private, its partners avoided taking too much risk with the firm’s capital -- which, of course, was their own capital.

Salomon was brassier -- perhaps because it didn’t have a gold-plated roster of clients to fall back on. At Salomon, Meriwether built a trading powerhouse, one that Corzine envied. In the early 1980s, Salomon became a public company, and Meriwether’s famous bond arbitrageurs had more capital to trade with.

Rise of Trading
The shorthand story of Wall Street over the last generation is that every firm -- Goldman included -- became less like the old Goldman, more like Salomon. Old-line commercial banks like JP Morgan and Bankers Trust were converted into derivatives traders. Venerable investment banks like Lehman Brothers and Morgan Stanley became packagers of mortgages -- essentially, shops for buying and selling, assembling and splicing, mortgage securities. And all with other people’s money.

By the mid ‘90s, Corzine was the top executive at Goldman and it, alone among the major Wall Street firms, remained privately owned (it went public in 1999.) But even Goldman was metamorphosing into a trading powerhouse. Corzine knew the risks (Goldman was burned in the volatile market of ‘94) but he was also sensitive to the potential profits. That same year, when Meriwether founded LTCM, Corzine flirted with the idea of buying an investment in the hedge fund.

He didn’t, but Goldman did become a banker to LTCM, and on attractive terms to the fund. Corzine wanted to be close to LTCM -- surely because, if Meriwether’s team was on to a good trade, Corzine wanted Goldman to be there, too.

In September 1998, after Russia defaulted on its debt, LTCM blew up. Some people thought the firm’s arbitrage trades were well-conceived, some thought the firm was arrogant, but everyone understood their mistake. LTCM was too leveraged. If 97 percent of your capital is borrowed, you can’t afford to make a trade that may be correct eventually, because in the meantime creditors will put you out of business.

Strongly cajoled by the Federal Reserve, Corzine and other Wall Street CEOs engineered a rescue of LTCM. Shortly after, Corzine’s Goldman partners forced him out. But Corzine’s romance with Meriwether wasn’t over. The two lions of Wall Street, both in a sort of exile, fantasized that they, together, could buy the hedge fund from the Wall Street banks that had rescued it. They tried to raise money, but the effort fizzled.

The lesson of LTCM was that no trading operation is better than its ability to withstand losses. This lesson was proved in spades, in 2008, at highly leveraged banks such as Bear Stearns and Lehman Brothers.

A History Lesson
A second lesson is that seemingly unlikely events may be more likely than market history suggests. Russia had not defaulted since 1917, but that didn’t stop it from happening in 1998.

And a further lesson of LTCM’s demise was that the widespread belief that liquidity offers safety is, in fact, an illusion, and a terribly dangerous one at that.

Time and again, otherwise canny investors fall for the salve that in a liquid market, they can always get out, therefore what’s the problem? At Lehman, in the mid 2000s, executives took comfort in the notion that that the bank was in the “moving business” not the “storage business.” Then, the mortgage market froze, and everyone was in the storage business.

Liquidity is a backward-looking yardstick. If anything, it’s an indicator of potential risk, because in “liquid” markets traders forego trying to determine an asset’s underlying worth - - they trust, instead, on their supposed ability to exit. Investors now in low-yielding U.S. Treasury bonds may, one day, discover this lesson for themselves.

It’s hard to overestimate the extent to which the siren of liquidity has seduced even ordinary Americans. During the housing bubble, anyone who took out a mortgage they couldn’t afford, upon advice they could always refinance, was tacitly assuming they could trade their old loan for a new one. They were counting on continued liquidity in the mortgage market--and so were the banks that lent them the money.

Corzine was able to sidestep the subprime madness by becoming a U.S. senator from New Jersey and then governor. As a public servant, he seemed more cautious than in his CEO days. In Trenton, he never quite commanded the stage, nor did he solve the tremendous fiscal woes he inherited as governor. In his re- election bid in 2009, he was defeated by Chris Christie.

I liked him as an executive and as a public official (on one occasion, we shared a classroom at Princeton University). Like few very wealthy banking executives, Corzine saw Wall Street’s shortcomings, had a sense of its role in society. And I wondered, after he was retired from politics, why he chose to return to the Street, taking control of a futures broker, MF Global Holdings Ltd., which collapsed spectacularly this week. It now looks as though Corzine still felt the trader’s itch.

Betting the Firm
MF Global was leveraged 30 to 1, shades of LTMC. And of MF Global’s roughly $40 billion in assets, more than $6 billion were in volatile European sovereign debts. Corzine was the author of the firm’s strategy of risking its own capital. He wanted a firm like Meriwether’s, and he got one. Corzine also approved the strategy of loading up on European debt. According to the Wall Street Journal, he told a company executive that “Europe wouldn’t let these countries go down.” Just as, 13 years ago, traders believed that Russia wouldn’t default.

Corzine’s bet may still prove correct; “these countries” -- Italy and Spain, for instance -- may emerge from the current crisis solvent. But if they do, MF Global will not be around to reap the gains. Because the firm was so highly leveraged, and because it was dependent on short-term financing, its liquidity dried up and it failed. This seems to be the lesson that Wall Street never learns.

The good news is that MF Global was just a brokerage, not a first-tier investment bank. The world will get by without it. Fortunately, thanks to the post-crash Dodd-Frank legislation -- the Volcker Rule in particular -- regulated banks are prohibited from risking their capital in proprietary trading. They will also have to maintain higher capital levels.

There is room for further reform as well. The culture of trading has overwhelmed Wall Street’s economic function, which is simply to provide a conduit for savings into productive use. Instead, too much of Wall Street has become a casino. A tax on financial transactions to slow down trading would be a good place to start. And the collapse of MF Global reminds us why, for all its unfortunate complexity and undo verbiage, Dodd-Frank was necessary.

Someday, business schools may teach their students about liquidity and risk, about the perils of short-term funding and leverage. Someday the lessons of LTCM may be learned. But don’t hold your breath. Corzine had a ringside seat, and the message didn’t stick. Human nature loves a risk. Best to keep the gamblers where they can’t do so much harm.


http://www.bloomberg.com/news/2011-...ns-of-long-term-capital-roger-lowenstein.html

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As I built what became the nation’s largest individual lobbying practice -- with 40 employees at its peak -- I remained the only lobbyist in the firm who had not previously worked on Capitol Hill. Former Congress members and staff are everywhere on K Street, the lair of the lobbying world. Why? Because they have access.

That access was crucial to our lobbying efforts. If we couldn’t get in the door, we couldn’t present our client’s case to decision makers. Hill veterans also had expertise. They knew the Byzantine legislative process and how to make it work for clients. Access and expertise: That’s how the great lobbying machines work.

But that’s not all.

I had many arrows in my lobbyist quiver to endear our firm to Congress: two fancy Washington restaurants that became virtual cafeterias for congressional staff, the best seats to every sporting event and concert in town, private planes at the ready to whisk members and staff to exotic locations, millions of dollars in campaign contributions ready for distribution. We had it all. But even with these corrupting gifts, nothing beat the revolving door.

During my time lobbying, I found that the vast majority of congressional staff I encountered wanted to get a job on K Street. And why not? Their jobs on the Hill were only as secure as their boss’s re-election prospects. Even then, they were never certain when they would encounter an office purge. The other side of the rainbow -- K Street -- was heavenly. Salaries were much higher. Perks were abundant. And lobbying is a growth industry, no matter which party is in office. As young staff members got married and had children, making the jump to K Street was often on their minds.

As I cultivated relationships on the Hill, or as the firm’s lobbyists transformed their congressional friends into champions for our clients, I noticed the staff members craved a job on K Street far more than a fancy meal or a Washington Redskins ticket.

Loyal Staff
Most staff were fiercely loyal to their boss and to the institution they served. But, once they thought there was a chance to join our firm sometime down the line, they switched teams -- psychologically first, and then in conduct. Understanding this, we would drop hints about the gilded life that awaited them on K Street, or share jokes with them about our future together as colleagues.

Staff members who thought they might be hired by our firm inevitably began acting as if they were already working for us. They seized the initiative to do our bidding. Sometimes, they even exceeded the lobbyists’ wishes in an effort to win plaudits. From that moment, they were no longer working for their particular member of Congress. They were working for us. They would alert us to any inside information we needed to serve our clients. They would quash efforts to harm our clients, instead seeding appropriations and other benefits for them. I emphasize: They were working for us.

Our situation was not unique.

During my years as a lobbyist, I saw scores of congressional staff members become the willing vassals of K Street firms before soon decamping for K Street employment themselves. It was a dirty little secret. And it is a source of major corruption in Congress.

There is only one cure for this disease: a lifetime ban on members and staff lobbying Congress or associating in any way with for-profit lobbying efforts. That seems draconian, no doubt. The current law provides a cooling off period for members and staff when joining K Street. The problem is that the cooling off period is a joke.

Here’s how it works. “Senator Smith” leaves Capitol Hill and joins the “Samson Lobbying Firm.” He can’t lobby the Senate for two years. But, he can make contact with his former colleagues. He can call them and introduce them to his new lobbying partners, stressing that although he cannot lobby, they can. His former colleagues get the joke, but the joke’s on us.

Because the vast majority of lobbyists start on the Hill, this employment advantage is widely exploited. It cannot be slowed with a cooling off period. These folks are human beings, not machines -- and human beings are susceptible to corruption and bribery. I should know: I was knee-deep in both. Eliminating the revolving door between Congress and K Street is not the only reform we need to eliminate corruption in our political system. But unless we sever the link between serving the public and cashing in, no other reform will matter.

(Jack Abramoff is the author of “Capitol Punishment: The Hard Truth About Washington Corruption From America’s Most Notorious Lobbyist.” He spent three years in federal prison for corruption and tax evasion.



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This evening, we meet at a time of financial and economic crisis in our nation and around the globe. I venture to assert that when the history of the financial era which has just drawn to a close comes to be written, most of its mistakes and its major faults will be ascribed to the failure to observe the fiduciary principle, the precept as old as holy writ, that “a man cannot serve two masters.” No thinking man can believe that an economy built upon a business foundation can permanently endure without some loyalty to that principle. The separation of ownership from management, the development of the corporate structure so as to vest in small groups control over the resources of great numbers of small and uninformed investors, make imperative a fresh and active devotion to that principle if the modern world of business is to perform its proper function.

Yet those who serve nominally as trustees, but relieved, by clever legal devices, from the obligation to protect those whose interests they purport to represent, corporate officers and directors who award to themselves huge bonuses from corporate funds without the assent or even the knowledge of their stockholders . . . financial institutions which, in the infinite variety of their operations, consider only last, if at all, the interests of those who funds they command, suggest how far we have ignored the necessary implications of that principle. The loss and suffering inflicted on individuals, the harm done to a social order founded upon business and dependent upon its integrity, are incalculable.

As you may have already figured out, those words (except for the very first sentence) are not mine. Rather they are the words of Harlan Fiske Stone, excerpted from his 1934—yes, 1934—address at the University of Michigan Law School, reprinted in The Harvard Law Review later that year. But his words are equally relevant—perhaps even more relevant—on this very day. For they could hardly present a more appropriate analysis of the causes of the present-day collapse of our financial markets and the economic crisis now facing our nation and our world.

You could easily react to Justice Stone’s words by falling back on the ancient aphorism, “the more things change, the more they remain the same,” and move on to a new subject. But I hope you’ll react differently, and share my reaction: In the aftermath of that Great Depression and the stock market crash that accompanied it, we failed to take advantage of the opportunity to demand that our giant businesses and financial organizations—the trustees of so much of our nation’s wealth—measure up to the stern and unyielding principles of fiduciary duty described by Justice Stone. So, 75 years later, for heaven’s sake, let’s not make the same mistake again.

The Columbia Connection
Given this history and this topic, it seems singularly fitting to present this lecture at Columbia University. For Harlan Fiske Stone (1872-1946) ranks among Columbia’s most distinguished sons. He received his law degree here in 1898, and returned to serve as dean of Columbia Law School from 1910 to 1923. In 1924, President Calvin Coolidge named Stone as attorney general, and in 1925 appointed him as associate justice of the United States Supreme Court. In 1941, President Roosevelt appointed him as Chief Justice of the United States. When Stone died in 1946, after 21 years of service on the Court, he left a remarkable legacy of career accomplishment, judicial philosophy, and worldly wisdom.1

It seems particularly fitting, then, to discuss Justice Stone’s philosophy and his remarkably prescient warning about the abject failure of our corporate and financial institutions that we have witnessed during the recent era, so remarkably similar to their failure some three generations earlier. It is even more fitting to discuss these issues at the annual KPMG Peat Marwick/Stanley R. Klion Forum for 2009, part of Columbia’s effort to encourage greater awareness of the ethical dilemmas faced by today’s business leaders. Included among these leaders are the chiefs who manage our publicly-held corporations—today valued in the stock market at some $10 trillion—and the professional managers of “other people’s money” who oversee equity investments valued at some $7 trillion of that total, owning 70 percent of all shares and therefore holding absolute voting control over those corporations. Like their counterparts in business, those powerful managers have not only an ethical responsibility, but a fiduciary duty, to those whose capital has been entrusted to their care.

Fiduciary Duty
The concept of fiduciary duty has a long history, going back more or less eight centuries under English common law. Fiduciary duty is essentially a legal relationship of confidence or trust between two or more parties, most commonly a fiduciary or trustee and a principal or beneficiary, who justifiably reposes confidence, good faith, and reliance in his trustee. The fiduciary acts at all times for the sole benefit and interests of another, with loyalty to those interests. A fiduciary must not put personal interests before that duty, and, importantly, must not be placed in a situation where his fiduciary duty to clients conflicts with a fiduciary duty to any other entity.

Way back in 1928, New York’s Chief Justice Benjamin N. Cardozo put it well:

Many forms of conduct permissible in a workaday world for those acting at arm’s length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace . . . As to this there has developed a tradition that is unbending and inveterate . . . Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior . . . Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.​

It has been said, I think accurately, that fiduciary duty is the highest duty known to the law.

It is less ironic than it is tragic that the concept of fiduciary duty seems far less imbedded in our society today than it was when Stone and Cardozo expressed their profound convictions. As ought to be obvious to all educated citizens, over the past few decades the balance between ethics and law, on the one hand, and the markets on the other have heavily shifted in favor of the markets. As I have often put it: We have moved from a society in which “there are some things that one simply does not do,” to one in which “if everyone else is doing it, I can do it too.” I’ve described this change as a shift from moral absolutism to moral relativism. Business ethics, it seems to me, has been a major casualty of that shift in our traditional societal values. You will hardly be surprised to learn that I do not regard that change as progress.

At least a few others share this view. In her 2006 book Trust and Honesty, Boston University Law School professor Tamar Frankel provides worthy insights on the diminishing role of fiduciary duty in our society. She is concerned—a concern that I suspect that many of you here tonight would share—that American culture has been moving toward dishonesty, deception, and abuse of trust, all of which have come to the fore in the present crisis. What we need, she argues, is “an effective way to increase trust (by) establishing trustworthy institutions and reliable systems,”even as she despairs the pressures brought out by the stock market and real estate bubbles that led to “deteriorating public morals . . . and burst into abuse of trust.”

In Professor Frankel’s view, “we reduced the power of morality in law . . . emasculated the regulation of trusted persons (that is, fiduciaries) . . . abused the laws that govern fiduciaries’ honesty . . . and opened the door to enormous losses to the public and the economic system.” We also came to ignore the critical distinction between fiduciary law itself and a fiduciary relationship subject to contract law. What’s more, she writes, “the movement from professions to businesses was accompanied by changes in the way the law was interpreted.” We forgot the fundamental principle expressed by Matthew and Luke, and repeated by Justice Stone: “No man can serve two masters.”

My principal objection to moral relativism is that it obfuscates and mitigates the obligations that we owe to society, and shifts the focus to the benefits accruing to the individual. Self-interest, unchecked, is a powerful force, but a force that, if it is to protect the interests of the community of all of our citizens, must ultimately be checked by society. The recent crisis—which has been called “a crisis of ethic proportions”—makes it clear how serious that damage can become.

Causes of the Recent Crisis
The causes of that crisis are manifold. Metaphorically speaking, the collapse in our financial system has 1,000 fathers. The cavalier attitude toward risk of our bankers and investment bankers, holding a toxic mix of low-quality securities on enormously leveraged balance sheets. The lassiez-faire attitude of our federal regulators, reflected in their faith that “free competitive markets” would protect our society against excesses. The Congress, which rolled back legislative reforms going back to the depression years. “Securitization,” in which the traditional link between borrower and lender—under which lenders demanded evidence of the borrowers’ ability to meet their financial obligations—was severed. Reckless financial innovation in which literally tens of trillions of dollars of derivative financial instruments (such as credit default swaps) were created, usually carrying stupefying levels of risk and unfathomable levels of complexity.

The radical increase in the power and position of the leaders of corporate America and the leaders of investment America has been a major contributor to these failures. Today’s dominant institutional ownership position of 70 percent of the shares of our (largely giant) public corporations compares with only about 8 percent of all corporate shares a half-century ago. This remarkable increase in ownership has placed these managers—largely of mutual funds (holding 25 percent of all shares), pension funds (20 percent), hedge funds, and endowment funds—in a position to exercise great power and influence over corporate America.

But they have failed to exercise their power. In fact, the agents of investment America have failed to honor the responsibilities that they owe to their principals—the last-line individuals who have much of their capital wealth committed to stock ownership, including mutual fund shareowners and pension beneficiaries. The record is clear that, despite their controlling position, most institutions have failed to play an active role in board structure and governance, director elections, executive compensation, stock options, proxy proposals, dividend policy, and so on.

Given their forbearance as corporate citizens, these managers arguably played a major role in allowing the managers of our public corporations to exploit the advantages of their own agency, not only in executive compensation, perquisites, and mergers and acquisitions, but even in accepting the “financial engineering” that has come to permeate corporate financial statements, endorsed—at least tacitly—by their public accountants.

But the failures of our institutional investors go beyond governance issues to the very practice of their trade. These agents have also failed to provide the “due diligence” that our citizen/investors have every reason to expect of the investment professionals to whom they have entrusted their money. How could so many highly-skilled, highly-paid securities analysts and researchers have failed to question the toxic-filled leveraged balance sheets of Citicorp and other leading banks and investment banks and, lest we forget, AIG?2 The ethics-skirting sales tactics of CountryWide Financial? Even earlier, what were these professionals thinking when they ignored the shenanigans of “special purpose entities” at Enron and “cooking the books” at WorldCom? Again, going back to the stock market high reached in 2007, how many analysts questioned the typical corporate assumption that their pension plans would earn future returns of 8½ percent per year, now obviously a deeply flawed assumption that is sowing the seeds of another crisis in the financing of our private and public retirement systems.

The Role of Institutional Managers
But the failure of our newly-empowered agents to exercise their responsibilities to ownership is but a part of the problem we face. The field of institutional investment management—the field in which I’ve now plied my trade for almost 58 years—also played a major, if often overlooked, role. As a group, we veered off-course almost 180 degrees from stewardship to salesmanship, in which our focus turned away from prudent management and toward product marketing. We moved from a focus on long-term investment to a focus on short-term speculation. The driving dream of our advisor/agents was to gather ever-increasing assets under management, the better to build their advisory fees and profits, even as these policies came at the direct expense of the investor/principals whom, under traditional standards of trusteeship and fiduciary duty, they were duty-bound to serve.

Conflicts of interest are pervasive throughout the field of money management, albeit different in each sector. Private pension plans face one set of conflicts (i.e., minimizing plan contributions helps maximize a corporation’s earnings). Public pension plans another (i.e., political pressure to invest in pet projects of legislators). And labor union plans yet another (i.e., pressure to employ money managers who are willing to “pay to play”). But it is in the mutual fund industry where the conflict between fiduciary duty to fund shareholder/clients often directly conflicts with the business interests of the fund manager.

Perhaps we shouldn’t be surprised that our money managers act first in their own behalf. Indeed, as Vice Chancellor Leo E. Strine, Jr., of the Delaware Court of Chancery has observed, “It would be passing strange if . . . professional money managers would, as a class, be less likely to exploit their agency than the managers of the corporations that make products and deliver services.” In the fund industry—by far the largest of all financial intermediaries—that failure to serve the interests of fund shareholders has wide ramifications. Ironically, the failure has occurred despite the clear language of the Investment Company Act of 1940 that demands that, “mutual funds should be managed and operated in the best interests of their shareholders, rather than in the interests of (their) advisers.”3

Here, in summary form, are just a few examples of how far so many fund managers have departed from that basic fiduciary principle, clearly enunciated in the 1940 Act:

1. The domination of fund boards by chairmen and chief executives who also serve as senior executives of the management company that controls the funds.

2. The mutual fund “time zone trading” scandals that came to light in 2003, in which some 23 companies—including many of the largest firms in the field—were implicated.

3. “Pay-to-play” distribution agreements using fund brokerage commissions (“soft dollars”) to finance share distribution that benefits the adviser.

4. As fund assets soared during the 1980s and 1990s, fund fees grew even faster, reflecting higher fee rates, as well as the failure of managers to adequately share the enormous economies of scale with fund shareholders.

5. Rising expense ratios for established funds; the average ratio of the seven largest funds of 1960 rose from 0.48 percent to 1.02 percent in 2003, an increase of 144 percent.

6. Managing assets for giant pension funds for fees that are dwarfed by those that they charge the mutual funds that they control. Three of the largest advisers, for example, charged an average fee rate averaging 0.08 percent to their pension clients and 0.61 percent to their funds, resulting in annual fees averaging $600,000 for the pension funds and $56 million for the mutual funds (presumably while holding the same stocks in both portfolios).

7. Spending enormous amounts on advertising—almost a half-billion dollars in the last two years alone—to bring in new fund investors, using money obtained from existing fund shareholders.

8. Creating exotic and untested “products” that have far more ephemeral marketing appeal than investment integrity.​

Given such failures as these, doesn’t Justice Stone’s warning that I cited at the outset seem even more prescient? Let me repeat the key phrases: The separation of ownership from management . . . corporate structures that. . . vest in small groups control over the resources of great numbers of small and uninformed investors . . . corporate officers and directors who award to themselves huge bonuses . . . financial institutions which consider only last, if at all, the interests of those whose funds they command. Just as we ignored the fiduciary principle all those years ago, so we have clearly continued to ignore it in the recent era. The result in both cases, using Justice Stone’s words: the loss and suffering inflicted on individuals, the harm done to a social order founded upon business and dependent upon its integrity, are incalculable. Today, as you know, much of that harm can be calculated all too easily, amounting to several trillions of dollars. So, this time ‘round, let’s pay attention, and demand a return to fiduciary principles.

A Piece of History
While the overwhelming majority of financial institutions operate primarily in the interests of their agents and at the expense of their principals, not quite all do. So I now draw on my personal experiences in the mutual fund industry to give you one example of my own encounter with this issue. As far back as 38 years ago, I expressed profoundconcern about the nature and structure of the fund industry. Only three years later, my convictions led to action, and 35 years ago this September, I founded a firm designed, to the best of my ability, to honor the principles of fiduciary duty.

I expressed these principles when doing so was distinctly counter to my own self-interest. Speaking to my partners at Wellington in September 1971—1971!—I cited the very same words of Justice Stone with which I opened my remarks this evening. I then added:

I endorse that view, and at the same time reveal an ancient prejudice of mine: All things considered, absent a demonstration that the enterprise has substantial capital requirements that cannot be otherwise fulfilled, it is undesirable for professional enterprises to have public stockholders. This constraint is as applicable to money managers as it is to doctors, or lawyers, or accountants, or architects. In their cases, as in ours, it is hard to see what unique contribution public investors bring to the enterprise. They do not, as a rule, add capital; they do not add expertise; they do not contribute to the well-being of our clients. Indeed, it is possible to envision circumstances in which the pressure for earnings and earnings growth engendered by public ownership is antithetical to the responsible operation of a professional organization. Even though the field of money management has elements of both, there are, after all, differences between a business and a profession . . (So we must ask ourselves this question): if it is a burden to our fund and counsel clients to be served by a public enterprise, should this burden exist in perpetuity?​

My candor may well have played a supporting role in my dismissal as chief executive of Wellington Management Company in January 1974. While it’s a saga too complex to detail this evening, my firing gave me the chance of a lifetime—the opportunity to create a new fiduciary-focused structure for our funds. I proposed just such a structure to the directors of the Wellington funds.4 Wellington Management Company, of course, vigorously opposed my efforts.

Nonetheless, after months of study, the directors of the funds accepted my recommendation that we separate the activities of the funds themselves from their adviser and distributor, so that the funds could operate solely in the interests of our fund shareholders. Our new structure involved the creation of a new firm, The Vanguard Group of Investment Companies, owned by the funds, employing their own officers and staff, and operated on an “at-cost” basis, a truly mutual mutual fund firm.

While Vanguard began with a limited mandate—to provide only administrative services to the funds—I realized that, if we were to control our own destiny, we would also have to provide both investment advisory and marketing services to our funds. So, almost immediately after Vanguard’s operations commenced in May 1975, we began our move to gain substantial control over these two essential functions. By year’s end, we had created the world’s first index mutual fund, run by Vanguard. Early in 1977, we abandoned the supply-driven broker-dealer distribution system that had been operated by Wellington since 1928, in favor of a buyer-driven “no-load” approach under our own direction. Later that year, we created the first-ever series of defined-maturity bond funds, segmented into short-, intermediate-, and long-term maturities all focused on high investment quality. Then, in 1981, Vanguard assumed responsibility for providing the investment advisory services to our new fixed-income funds as well as our established money market funds. (As you can imagine, none of these moves was without controversy!)

Let me give you some sense of the importance of those changes. Since our formation in 1974, the assets of the Vanguard funds have grown from $1 billion-plus to some $1 trillion today. Some 82 percent of that trillion—$820 billion—is represented by the passively-managed index funds, the bond funds, and the money market funds that we at Vanguard manage, distribute, and advise. Some 25 external investment advisers serve our remaining (actively-managed) funds, with Wellington advising by far the largest portion of those assets. (Most of these funds have multiple advisers, the better to spread the risk of underperformance relative to their peers.).

More than parenthetically, that long string of business decisions was made in a situation in which Vanguard’s very existence was in doubt. For the Securities and Exchange Commission had initially refused to approve Vanguard’s assumption of marketing and distribution responsibilities. But after a struggle lasting six (interminable!) years, the SEC reversed itself in February 1981. By unanimous vote, the Commission declared that:

The Vanguard plan is consistent with the provisions, policies, and purposes of the (Investment Company Act of 1940). It actually furthers the Act’s objectives . . . enhances the funds’ independence . . . benefits each fund within a reasonable range of fairness. . . (provides) substantial savings from advisory fee reductions (and) economies of scale . . . and promotes a healthy and viable mutual fund complex in which each fund can better prosper.​

A Prescient SEC?
Indeed. The SEC’s words now seem prescient. In fact, “can best prosper” would have been more accurate. Measured by Morningstar’s peer-based rating system (comparing each of our funds with other funds having distinctly comparable policies and objectives), Vanguard ranked first in performance among the 50 largest fund complexes.5

Advisory fee reductions and economies of scale? Once again, indeed. Vanguard’s low-costs are legendary, by far the lowest in the field. Last year, over all, our operating expense ratio came to 0.20 percent of average assets, compared to 1.30 percent for the average mutual fund. That 1.1 percentage point saving, applied to one trillion of assets, now gives our shareholders an average savings of $11 billion annually. Do low costs matter? Of course they do! As the world of investing is at last beginning to understand, low costs are the single most reliable indicator of superior fund performance. Yes, as we read in Homer’s The Odyssey, “fair dealing yields more profit in the end.”

If you are willing to accept—based on that solid data—that Vanguard has achieved both commercial success (asset growth and market share) and artistic success (superior performance and low costs), you must wonder why, after nearly 35 years of existence, no other firm has elected to emulate our shareholder-oriented structure. (A particularly ironic outcome, since I chose the name Vanguard in part because of its conventional definition as “leader in a new trend.”) The answer, I think, can be expressed succinctly: under our at-cost structure, all of the darned profits go to the fund shareholders, not to the managers, resolving the transcendent conflict of interest of the mutual fund industry. In any event, the leader, as it were, has yet to find its first follower.

To Build the Financial World Anew
Vanguard represented my best effort to align the interests of fund investors and fund managers under established principles of fiduciary duty. I leave it to wiser—and surely more objective—heads than mine to evaluate whether or not I overstate or hyperbolize what we have accomplished, even as I freely acknowledge that we owe our accomplishments to the three simple principles: the firm is (1) structurally correct (since we are owned by our fund investors); (2) mathematically correct (since it is a tautology that the lower the costs incurred in investing, the higher the returns); and (3) ethically correct (since we exist only by earning far greater trust and loyalty from our shareholders than any of our peers. There’s simply no close rival for our #1 position.) Please be appropriately skeptical of that self-serving claim, but look at the data. In a 2007 survey, an independent research group concluded, “Vanguard Group generates far more loyalty than any other company.”6

As you have just learned, restructuring the firm was no easy task. Without determination, expertise, luck, timing, and the key roles played by just a handful of individuals, it never could have happened. So when I suggest to this forum that we must now go beyond restructuring the nature and values of a single firm to restructuring the nature and values of the entire money management business, I am well aware of how difficult as task it will be to accomplish that sweeping task.

And yet we dare not stand still. For we meet at a time when, as never before in the history of the country, our most cherished ideals and traditions are being subjected to searching criticism. The towering edifice of business and industry, which had become the dominating feature of the American social structure, has been shaken to its foundations by forces, the full significance of which we still can see but dimly. What had seemed the impregnable fortress of a boasted civilization has developed unsuspected weaknesses, and in consequence we are now engaged in the altogether wholesome task of critical re-examination of what our hands have reared.

As you may have suspected, I’ve once again cited a section of Justice Stone’s 1934 speech, and it’s high time we take it seriously. For the fact is that there has been a radical change in our investment system from the ownership society of a half-century ago—which is gone, never to return—to our agency society of today—in which our agents have failed to serve their principals—mutual fund shareholders, pension beneficiaries, and long-term investors. Rather the new system has served the agents themselves—our institutional managers. Further, by their forbearance on governance issues, our money managers have also served the managers of corporate America. To make matters even worse, by turning to short-term speculation at the expense of long-term investment, the industry has also damaged the interests of the greater society. Hear Lord Keynes on this point:

When enterprise becomes a mere bubble on a whirlpool of speculation, the consequences may be dire . . . when the capital development of a country becomes a by-product of the activities of a casino . . . the job (of capitalism) will be ill-done.​

Yet despite these changes in the very nature of corporate ownership we have failed to change the rules if the game. Indeed, in the financial sector we have rolled back most of the historic rules regulating our securities issuers, our exchanges, and our investment advisers. While we should have been improving regulatory oversight and administering existing regulations with increasing toughness, both have been relaxed, ignoring the new environment and therefore bearing much of the responsibility for today’s crisis.

Of course American society is in a constant state of flux. It always has been, and it always will be. I’ve often pointed out that our nation began as an agricultural economy, then became largely a manufacturing economy, then largely a service economy, and most recently an economy in which the financial services sector had become its dominant element. Such secular changes are not new, but they are always different, so enlightened responses are never easy to come by. Justice Stone, once again, recognized that new forces demand new responses:

It was in 1809 when Jefferson wrote: “We are a rural farming people; we have little business and few manufactures among us, and I pray God it will be a long time before we have much of either.” Profound changes have come into American life since that sentence was penned. (These) inexorable economic forces, (create) public problems (that) involve an understanding of the new and complex economic forces we have created, their relationship to the lives of individuals in widely separated communities engaged in widely differing activities, and the adaptation to those forces of old conceptions developed in a different environment to meet different needs.7​

To deal with the new and complex economic forces our failed agency society has created, of course we need a new paradigm: a fiduciary society in which the interest of investors come first, and ethical behavior by our business and financial leaders represents the highest value.

Building a Fiduciary Society
While challenges of today are inevitably different from those of the past, the principles are age-old. Consider this warning from Adam Smith way back in the 18th century:

Managers of other people’s money [rarely] watch over it with the same anxious vigilance with which . . . they watch over their own . . . they very easily give themselves a dispensation. Negligence and profusion must always prevail.​

And so in the recent era, negligence and profusion have prevailed among our money manager/agents, even to the point of an almost complete disregard of their duty and responsibility to their principals. Too few managers seem to display the “anxious vigilance” over other people’s money that once defined the conduct of investment professionals.

So what we must do is develop a new fiduciary society which guarantees that our last-line owners—those mutual fund shareholders and pension fund beneficiaries whose savings are at stake—their rights as investment principals. These rights must include:

1. The right to have their money-manager/agents act solely in their behalf. The client, in short, must be king.

2. The right to rely on due diligence and high professional standards on the part of our money managers and securities analysts who appraise securities for our portfolios.

3. The right to demand some sort of discipline and integrity in the mutual funds and financial products that they offer.

4. The assurance that our agents will act as responsible corporate citizens, restoring to their principals the neglected rights of ownership of stocks, and demanding that corporate directors and managers meet their fiduciary duty to their own shareholders.

5. The establishment of advisory fee structures that meet a “reasonableness” standard based not only on rates but dollar amounts, and their relationship to the fees and structures available to other clients of the manager.

6. The elimination of all conflicts of interest that could preclude the achievement of these goals.​

More than parenthetically, I should note that this final provision would seem to preclude the ownership of money management firms by financial conglomerates, now the dominant form of organization in the mutual fund industry. Among today’s 40 largest fund complexes, only six remain privately-held. The remaining 34 include 13 firms whose shares are held directly by the public, and an astonishing total of 21 fund managers owned or controlled by U.S. and international financial conglomerates—including Goldman Sachs, Bank of America, Deutsche Bank, ING, John Hancock, and Sun Life of Canada. Painful as this separation might be, it is the single most blatant violation of the principle that “no man can serve two masters.”

Of course it will take federal government action to foster the creation of this new fiduciary society that I envision. Above all else, it must be unmistakable that government intends, and is capable of enforcing, standards of trusteeship and fiduciary duty under which money managers operate with the sole purpose and in the exclusive benefit of the interests of their beneficiaries—largely the owners of mutual fund shares and the beneficiaries of our pension plans.

While the government action is essential, however, the new system should be developed in concert with the private investment sector, an Alexander-Hamilton-like sharing of the responsibilities. The task of returning capitalism to its ultimate owners will take time, true enough. But the new reality—increasingly visible with each passing day—is that the concept of fiduciary duty is no longer merely an ideal to be debated. It is a vital necessity to be practiced.

So a lot is at stake in reforming the very nature of our financial system itself, which in turn is designed to force reform in our failed system of governance of our business corporations. What I’ve passionately advocated in these remarks is hardly widely-shared among my colleagues and peers. But soon, perhaps, many others will ultimately see the light. Only last week the idea of governance reform got encouraging support from Professor Andrew W. Lo of M.I.T., one of today’s most respected financial economists:

. . . the single most important implication of the financial crisis is about the current state of corporate governance . . . a major wake-up call that we need to change (the rules). There’s something fundamentally wrong with current corporate governance structures, (and) the kinds of risks that typical corporations face today.​

In sum, the change in the rules that I advocate—applying a federal standard of fiduciary duty to their clients for institutional money managers—would be designed in turn to force these managers to use their own ownership position to demand that the managers and directors of the corporations in whose shares they invest honor their own fiduciary duty to the holders of their shares. Finally, it is these two groups that share the responsibility for the prudent stewardship over corporate assets and investment securities alike that have been entrusted to their care, not only reforming today’s flawed and conflict-ridden model, but developing a new model that, at best, will restore traditional ethical mores.

And so I await—with no great patience!—the return of the standard so beautifully described by Justice Cardozo all those years ago, excerpts from his words cited earlier in my remarks:

Those bound by fiduciary ties . . . (are) held to something stricter than the morals of the marketplace . . . a tradition unbending and inveterate . . . not honesty alone but the punctilio of an honor the most sensitive . . . a level of conduct . . . higher than that trodden by the crowd.​

I owe it to Justice Harlan Fiske Stone’s legacy to conclude my remarks with yet one more quotation from his profound and prescient 1934 speech that has been the inspiration for my lecture this evening:

In seeking solutions for our social and economic maladjustments, we are too ready to place our reliance on what (the policeman’s nightstick of) the state may command, rather than on what may be given to it as the free offering of good citizenship . . . Yet we know that unless the urge to individual advantage has other curbs, and unless the more influential elements in society conduct themselves with a disposition to promote the common good, society cannot function . . . especially a society which has largely measured its rewards in terms of material gains . . . We must (square) our own ethical conceptions with the traditional ethics and ideals of the community at large.​

(There is) nothing more vital to our own day than that those who act as fiduciaries in the strategic positions of our business civilization, should be held to those standards of scrupulous fidelity which (our) society has the right to demand.

This Columbia Leadership and Ethics Week of 2009 gives us all the opportunity to strengthen our resolve to meet that test.


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1 A curious coincidence: Justice Stone appeared on the cover of TIME magazine on May 6, 1929, just two days before my own birth on May 8. In its profile story, TIME accurately speculated that one day Stone would become the chief justice, in part because (in those backward sentences that distinguished the early style of the magazine), “Well he has always tackled the public interest.”

2 I’m speaking here of the “buy-side” analysts employed directly by these managers. The conflicts of interest facing “sell-side” analysts were exposed by the investigations of New York Attorney General Spitzer in 2002-2003.

3 Securities and Exchange Commission decision, March 15, 1981.
***2002 data: page 199, The Battle for the Soul of Capitalism, by John C. Bogle, Yale University Press, 2005.

4 This lecture at Columbia University is essentially the third part of a trilogy that chronicles the development of the fund industry and of Vanguard itself. The first two parts of the trilogy were my speech at Boston University Law School on January 21, 2004 (“Re-Mutualizing the Mutual Fund Industry—The Alpha and the Omega”); and my speech at George Washington University on February 19, 2008 (“A New Order of Things: Bringing Mutuality to the ‘Mutual’ Fund”).

5 John Bogle speech at George Washington University on February 19, 2008 (“A New Order of Things: Bringing Mutuality to the ‘Mutual’ Fund”).

6 Cogent Research data, as reported in The Wall Street Journal, date March 15, 2007. Our loyalty score (percentage of strong supporters minus strong detractors) was plus 44. The fund industry scored a pathetic minus 12.

7 Again, words from Justice Stone’s article.

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