March 12-18 - Finance and Economics: Raj Rajara-not-going-to-be-working-here-anymore, Yale's endowment troubles, bank-less Americans, Libya's sovereign fund hanky panky, and why going to the reserve well is a dumb idea.

It's hard this week to be thinking about much other than Japan and Libya, and I'm still in awe at just how much has happened in the first calendar quarter of this year. But nonetheless, in a week where the newspapers and magazines and web sites are stocked with things you should be reading about both crises, I am dedicated to bringing you a summary of those things you definitely will not have time to cover. This week's edition is kind of a soft-ball - no tricky articles about Chinese inflation or banking laws (although there is a letter from a reader in the magazine's correspondence section about the former, and I cannot find the link, so be resourceful) so this should be easy.

In this week's Finance and Economics section:

• A study on income disparities among regions in OECD countries shows growing gaps in the U.S. and UK (but not in Germany, as we all know is the magazine's secret crush.)
• Another Wall Street giant, in this case Raj Rajaratnam, goes on trial for insider trading in during a time when most have little sympathy for white collar criminals.
• New analysis shows that Yale University, once thought to be an institutional genius of endowment investments, may have misplayed its hand by over-diversifying its portfolio.
• Mango Financial is among the vanguard of financial institutions looking to capture the market of Americans who don't have traditional bank accounts, a population that might grow with new checking charges at traditional retail banks.
• Speculation about the disposition of Libya's sovereign wealth fund assets in Europe, and whether or not they will disappear in the chaos.
• Finally, an argument in response to calls to tap the strategic petroleum reserve as oil prices rise following the turmoil in Libya.

But as always, let's first take a look at the ever-so-useful for water-cooler discussions...


This Week's Fun Economic Facts:

• The District of Columbia is five times as wealthy as the State of Mississippi...
• ...and Central London is nine times richer than Wales
• Adjusted for purchasing-power-parity, over 25% of the regions of the UK and Germany have a lower GDP per capita than Shanghai, and within ten years, half of all U.S. states could have a lower per capita GDP than Shanghai and Beijing.
• 48% of DC residents have college degrees, compared with 19% in Mississippi.
• $45 million: Amount in profits that Raj Rajaratnam's hedge fund pulled in from insider information.
• 20 Years: Amount of time he could spend in jail if he is convicted.
• Between 2008 and 2009, Yale's endowment dropped 24.6%, and Harvard's 27.3%
• At least 17 million American adults live in households with no bank accounts, and 43 million Americans use payday check cashing services per month.
• The Libyan sovereign wealth fund is estimated at between 50 and 70 billion dollars, or roughly $10,000 per Libyan.
• Economists estimate that the fighting in Libya has prevented 1.4 million barrels of oil per day from hitting international markets.

These facts and more after the jump (again, for the uninitiated: READ MORE!)...


Internal Affairs: I, like probably many of you, had seen studies and articles about the general phenomenon of rising income disparity, occasionally without the helpful context of why it matters, especially in the event that economic growth is present. In this piece, the Economist has performed an analysis of income disparity on a regional basis in seven OECD countries, the US, UK, China, France, Japan, Germany, and Italy, and finds  - perhaps unsurprisingly, that income disparity is on the rise between rich and poor regions, especially in the U.S. and in the U.K. While statistics ignore some mitigating realities, such as the fact that rural cost of living is less than urban living, the fact remains that productivity and the ability to attract bigger and more profitable companies brings more income to the cities.  The article is chock-a-block with interesting statistics, including the fact that between 2007 and 2009, GDP per capita in the five wealthiest US states rose by an average of 2%, but fell by 3% in the five poorest - meaning that the disparity is getting worse. The article is better at explaining how this happened than why it matters. For instance, the fact is that manufacturing as a component of the economy has been more important to poorer states such as Michigan. The same holds true for the UK, where things have generally gotten worse for Yorkshire and Northern Ireland as compared with central London.

Meanwhile, the trend has been less of a problem for our favorite European country, Germany, where things were less worse for the five poorest states than for the rest during the downturn. To combat the trend, some, according to the article, argue in favor of  infrastructure (public) investments, others argue that labor markets should be more flexible to adapt. (My personal contention is that home-ownership is a big problem in states where manufacturing is important, because people locked in mortgages can't move from state to state or adapt as easily to changes in the labor market.) The article instead argues that it is productivity - a derivative of education to them - that matters, and that the 19% in Mississippi who have a degree are at a disadvantage compared with DC or Connecticut, where the rates are 48% and 36% respectively. Unfortunately, public spending on education or otherwise, by states or by the government, becomes more constrained during economic downturns, so I guess the news isn't great.

Network Effects: Galleon Group Hedge Fund manager Raj Rajaratnam is in hot water for using his vast network of contacts to gain insider information that helped gain $45 million in profits on a fund that once managed as much as $6.5 billion. Some of the who's who of Wall Street, from firms as esteemed as Goldman Sachs and McKinsey will testify in the trial, and on the line is a jail sentence of as many as 20 years. In the broader context of the trial, however, a few other dynamics are at play. For one thing, the SEC is under a great deal of pressure to show that they're being tough on the heretofore basically unregulated hedge funds, the public has turned on Wall Street, and companies are quickly creating large compliance divisions to get ahead of regulators. Meanwhile, the investigations of hedge fund managers are like something out of the Untouchables, including big investigations using wiretaps and US attorneys hungry for prosecutions. Caught in the dragnet has been a doctor who revealed information about clinical drug trial deaths and a number of "expert network" firms which connects traders with consultants, who are only supposed to provide information they can find in the public domain. Reflecting on the consequences of the raids and arrests, including some funds closing down and many pulling their investments, one hedge fund manager quoted in the article likened the clampdown to McCarthyism. But, as noted earlier, most funds are creating compliance divisions and attempting to self-regulate, which puts the larger funds at an advantage over their smaller competitors. Zzzzzzz.....


Buttonwood: Yale May Not Have the Key:  For those of you like me whose retirement at least partially sits in mutual funds (especially the USG's Thrift Savings Plan): This is an interesting article about the performance over time of Yale's endowment investment portfolio, which had adopted a somewhat unique and in any case innovative approach to investment. Operating on the premise that University liabilities (like buildings and salaries etc) are long term payouts, the University took a long term approach to the way it invested and diversified its holdings across a number of areas. The so-called "Yale Model", adopted by its namesake University in the 1980s, invests in a wide range of "alternative assets", such as hedge funds and even commodities like timber. For a long time, the model worked pretty well, with its private equity producing in excess of 30% return on investment and its hedge fund hitting the 11.5% mark on average between 1999 and 2009, surpassing the average endowment. Here's the rub - the illiquidity that derives from investing in these kinds of areas, which can offer better return on investment works against the investment during times of economic downturn and instability - the same reason that you shift your retirement account into bonds as you grow older. Those of us who suffered through Money and Banking in college will recall the concept of the risk Beta, where an assett with a beta greater than 1 out-performs the market during times of growth, but also falls more when it drops. In the case of Yale, their beta increased in 2008 just before the market collapsed, starting with Lehman's tanking. The instability is not only a problem that stems from illiquidity, argues Buttonwood, but also from the fact that many of the classes of investment are afflicted with a phenomenon called the "row-boat" effect, such as the end result of the mortgage-backed securities tragedy, when as the investment became unreliable, everybody bailed at the same time and the boat capsized, tanking the asset values for everybody. In a comparison with other endowments, the one with a traditional 60/40 equity/bonds ratio performed about the same as the Yale endowment in terms of its performance compared with the S&P 500 - so during the boom, the endowment essentially behaved the same as a traditional fund, and during the bust, it lost more money. More frustrating is that investing in the alternative instruments also involves higher fees for managers (hence the phenomenon of the ridiculously rich hedge fund manager), as high as 20%.

Alienated: Ever get a little bit depressed looking at those check-cashing places, knowing that a lot of workers are getting ripped off by the 15-20% fees? Yeah, that was me in high school, when I was mowing lawns for a landscaping company and didn't have a bank account (or at least the car to go to the bank) and wanted the cash on hand to get through the weekend. Well, in response to what is a growing population of Americans (currently about 17 million adults) without bank accounts, new financial services are popping up that offer pre-paid debit cards, 5% interest on deposits, and lower deposit thresholds. The companies are relying on the fact that the Dodd-Frank rules will actually mean that credit card companies and banks will offer their services to fewer Americans, or that the new fees created by the rules for checking accounts will drive Americans out of traditional retail banks. Although the article suggests that a huge number of illegal immigrants, who borrowed about 2 billion in mortage loans between 1997 and 2004 as a result of the new Taxpayer Identification Number being accepted on loan applications vice Social Security Numbers, will face new problems in borrowing based on the skittishness of newly risk-averse banks, nonetheless, more firms will look for ways to cash in on the "bankless", such as WalMart and K-Mart, who have started check-cashing services at a much lower rate than the crooks who used to steal my hard earned dough.

From Tripoli to Mayfair: I guess the world is learning from the lessons of Mobutu and other dictators who stored billions of their country's wealth abroad while their people starved, because all eyes are currently searching for the billions in assets in the Libyan (and presumably Tunisian and Egyptian) sovereign wealth fund, the Libyan Investment Authority (LIA), which is managed by a small firm in the U.K called Dalia Advisory Limited. The fund is estimated to contain about 50-70 billion dollars in assets, but they are highly diversified and sit in cash and liquid assets, which are harder to find and easier to disappear, and they evidently have been put in markets throughout Africa that allow them to evade sanctions or detection.  There are some signals that the fund's managers in the UK are at least professional enough not to beat feet out of the country with cash in their undies, although there is concern because some of the executives from the LIA have fled the country - one for Austria, another for Libya.  Let's hope the money is accounted for, because as noted above, the total fund's worth is equal to 10k for every Libyan.

Held in Reserve: And finally (until mid-week, when I will do my best to do what I have not yet, which is post on the Economics focus piece), an article as kind of a book-end on a discussion we've had twice now - the impact of tumult in the middle-east on oil prices. This time, the impact of a Libyan disruption, which is estimated at about 1.4 million barrels a day. So far, OPEC, led by Saudi, has shown signs that it is willing to increase production to make up for the shortfall on global markets, which brought the price per barrel back below $120 (where it was just after Egypt, right?), but signs of future instability could drive prices higher regardless. Concerns have predictably started a debate on whether or not the United States should tap into its strategic reserve, currently sitting at about 727 million barrels (not to mention the Japanese 320 million and European 420 million barrels) created after the 1973 oil crisis. Our friends at the Economist make a compelling argument for why this is not sound policy. For one thing, if the gap in production is being sufficiently met by OPEC, there is no reason to increase supplies on the margin. Secondly, it would create more uncertainty, and could have the unintended consequences of actually causing a price per barrel raise on the international market. Finally, as President Obama once actually raised in his campaign, price in this market derives from long term trends, so it would be better to focus policies that emphasize less consumption.There's a novel idea I should apply to my diet.

Ok, well, not going to lie - a difficult night to post after watching my George Mason Patriots take a severe licking at the hands of the Ohio State University. And of course, at the forefront of my mind is the fact that as I am one week behind, there sits a new issue full of more recent articles about Japan and Libya. If you have not already done so, please donate to the Red Cross or another reputable organization. And I will try to check in with you all midweek with some more content. I'm also thinking of hosting a weekly essay contest for some kind of prize. This week's essay, in 1000 words or less, describe the implications of the Pimco T-Bill selloff, and please include a discussion of the relationship between the bond-dump and Quantitative Easing.

In the meantime, it's officially baseball season.