Motley Fool Money - Motley Fool Money: 12.23.2011

Episode Date: December 23, 2011

On this week's show, we discuss the MF Global scandal, preview the year ahead, and share some stocks on our radar.   Plus, former Gambino family associate Louis Ferrante talks about his book, Mob Rules: What the Mafia Can Teach the Legitimate Businessman. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Motley Fool Money. Thanks for being here. I'm your host, Chris Hill, and we've got a special edition of Motley Full Money this week. We're going to have an encore presentation of one of my favorite interviews of the year. That's former mobster-turned best-selling author, Louis Ferranti. That's a little later in the show.

But right now, we are going to start digging into the collapse of MF Global. This is a story you've probably seen in the headlines. We did an in-depth series of articles on Fool.com. I talked about that on last week's show. Joining me on the line now, two of the guys who worked on that series of articles, longtime contributors for the Motley Fool, Matt Coppenheifer, and Tim Byers. Guys, thanks for being here. Thanks, Chris.

Matt, I'm going to start with you. In a nutshell, what happened with the collapse of MF Global? Well, basically, Chris, what you had was this company, MF Global, it was in the brokerage business, largely the future's brokerage business. And it ran into some problems, basically poor compliance and controls internally. A trader lost a bunch of money for them. They ended up with this investor stepping in Chris Flowers. He kind of, you know, from the outside, started to try to get the company back into shape, eventually brought in a buddy of his, John Corzine, who a lot of people know is a former U.S. Senator,

former governor of New Jersey, and he concocted this strategy to turn this broker into a full, full-on investment bank. What that ended up looking like is taking on a lot of risk at the company, including a $6.3 billion bet on European debt. And that eventually spooked the market, spooked all of their counterparties, and it led to sort of a bankruptcy spiral. Now, that was bad enough, but even worse was the fact that as they went into this bankruptcy spiral, they revealed the fact that $1.2 billion of customer money. And when I say customer money, things like bank accounts or securities accounts, like your e-trade account or your Scot trade account, that money suddenly went missing.

So now we've got bankruptcy court, trustees, lawyers, everybody stepping in, trying to sort out. We've got the FBI in there trying to sort out what the heck is going on and where this money went. Tim Byers, I want to turn to you. I look at this story as kind of an interesting story, but ultimately one that doesn't affect me. I look at John Corzine. I see him testifying before Congress saying, I don't know where the money is. and I know that's caused some people pain. As an average investor, this story doesn't affect me.

So why should the average investor care about the fact that essentially these rich bankers blew it and lost money that ultimately didn't belong to them? Well, and I think the last part of what you said, Chris, is most important. They lost money that didn't belong to them. And so it's really tragic when customers get stuck figuring out how to get their money back when they did nothing to lose it. And so Matt said, you know, $1.2 billion, $1.2 billion, and customer money is missing. So think about who that affects. A big chunk of that money goes to farmers, for example, that we're using MF Global to hedge contracts and say, you know what,

I think I'm going to sell this, you know, whatever number of bushels of wheat in June. So what's the price on that in in june and so they lock it in and they do all kinds of financial planning and they can essentially be assured that they're going to get that get that money and and uh the contracts are going to get paid but mf global blows up those contracts go missing they have to you know meet margin calls a lot of things go bad and there were farmers that we spoke to that we're suffering very badly as a result of this so this isn't just a rich guy's story that's that's one thing the second thing is, you know, there's the health of the markets to consider. When this stuff keeps happening, when guys that have very little to lose, blow things up and don't get punished, it makes the market

a little bit more difficult to participate in. It makes it harder to regulate. And it has, it just puts a pall on the industry. So I think this is something that we have to fix so that we don't keep having repeating cycles of one blow up after another. You know, of 2008 and Lehman Brothers, and now we've got 2011 and MF Global. I don't want 2012 and name the next blow up here. So how do we prevent that? What needs to happen at the macro level or at the government level to make sure that this type of thing doesn't happen again? I think one of the ways you have to think about this is it's sort of two, they're obviously connected, but one story is MF Global going bankrupt and the other story is 1.2.2.

billion dollars of customer money disappearing. For the bankruptcy, you know, in a sense, you don't really want to try to regulate away failure. I mean, if you think about the banking crisis and Lehman failing and all of the government bailouts and everything like that, I think there's a valid

argument for saying when a financial company does something stupid, they should fail, you know, bottom line. And so, that MF Global went bankrupt, there's something very right in that, you know? And the, you know, the system didn't melt down, we don't have the sky falling and all that kind of stuff.

I think there are some accounting changes that could take place that would have made what MF Global was doing a little bit more transparent. On the other hand, though, this $1.2 billion of money missing, the caveat, of course, is that there's still a lot of facts that need to be uncovered as far as what exactly happened there. I think one change that we heard a lot of people talk about, and we like the idea, is having an insurance fund for the futures industry. So for bank accounts, there's the FDIC, so if money goes missing for some reason from your bank account, the FDIC steps in and will make you whole.

In the equities industry, there's SIPIC, which in a similar way will step in and make customers whole. In the futures industry, there's no such case of MF global. All of these customers whose money is potentially missing are in real danger here because If the money turns out to truly be missing, it's gone. They're out. They're out. And so we think that having some sort of insurance fund, whether it's government-sponsored or some sort of industry-organized thing, that would be good. We talked about sort of the macro level of how we prevent this.

What about at the individual level? What are one or two things that individual investors can do to avoid being caught up in this type of situation? You know, Chris, I think there are two things. You can never do too much due diligence, first of all. You know, always read the financial statements and commit to knowing the businesses you are. I mean, I know this is a foolish principle that we talk about over and over and over again, but one of the things you'll find in reading the series, both Alex and Matt did some digging on this, and there were some clues in the financial statements.

Now, admittedly, MF Global is a very complex business, and some of the risks were moved off the balance sheet, so you wouldn't have seen everything, but there were some warning signs. And then second, I'd say when it comes to investing in financial institutions, one of the things that regulators really get right is record-keeping. You can check up on your broker. You can check up on banks. You can check up on an investment bank. And in the case of MF Global, some of the digging that we did found that MF Global and some of its predecessor companies are one of the biggest violators of exchange rules, things like record keeping, trading violations.

There were a lot of warning signs in the disciplinary records, and those are public. In the case of MF Global, it's at the National Futures Association, but the comptroller of the currency keeps banking records, the SEC. keeps all kinds of disciplinary records, and there is a section of the SEC enforcement website where you could just see a litany of actions that the SEC is taking. So if you want to know who is getting in trouble, it's real easy to find out. But I think as investors, we don't consciously look at, you know, start looking around for disciplinary records. We want to trust people. But maybe what MF Global teaches us is that, you know, okay, trust, but verify. Now that we've wrapped up MF Global, we will look ahead to get an investing preview of 2012.

Stay right here. You're listening to Motley Fool Money. Make me happy this year. Listen to me, honey. Give Pearl something. There'll be some use to me, like a five-pound box of money. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so no buyer sell stocks based solely on what you hear. I'm Chris Hill and joining me on the line still long time Motley Fool contributors Matt Coppen Heffer and Tim Byers.

Next week on Motley Fool Money, we're going to be doing our 2012 preview. It's the entire show, but you guys get the first shot. Tim, I will start with you. As you look ahead to 2012, what is the biggest investing question you have? Will Netflix recover? And I think they will. I don't believe that all of the Talk of Reed Hastings being the worst CEO ever is worth anything. I do believe that we're too early in the process of figuring out content arrangements and streaming arrangements to write off Netflix. Obviously, Netflix is a long-time recommendation of Motleyville Stock Advisor, our flagship service. And certainly, you know, this year going up to July, it was having a great year,

it really fell off a cliff. Is this sort of like, you know, someone was saying the other day in the office, this is a little bit like a pro athlete entering his third season. You know, he had a great rookie season, had the sophomore slump, and this is, you know, this is the year where you find out what Netflix is really made of.

Yeah, I'd agree with that, and I'd also say that the industry is figuring out how to use Netflix. So it's like, you know, Netflix as the great receiver, tons of talent, you know, runs great routes, and now the, you know, they've found something that it can't do. And so, you know, the quarterback's trying to figure out, okay, how am I going to exploit, you know, this great weapon that I've got. And I think that's, that's Hollywood. You know, there's two, this is too good a distribution engine. Hollywood is not going to write off Netflix. There is going to be an iTunes-like deal in which it's going to make sense

to distribute through Netflix. It's going to be economical. It's going to get to a lot of devices. It's going to get over the web, and it's going to pay. Remember that the industry, the recording industry, is not very happy with Steve Jobs in what they did, and the deal they had to sign with iTunes. They didn't like 99 cents a track. They wanted $2.99, $3.99 a track, and he told them they were crazy.

And I think Reed Hastings is persuasive enough, smart enough, to get Hollywood to understand that a flat rate, and all you can eat subscription buffet makes sense. On the back end, they're going to figure out how Hollywood gets paid fairly, but without killing the model, I think he'll do it. Matt Coppenhefer, what's your big investing question for 2012? Well, I'm going to be a little bit more boring here, Chris, and I'm going to go with Europe and what ends up unfolding there.

It's big, it's important, and it has the propensity to really shake the entire, world. I mean, as it has been, for anybody that's been watching the volatility of the market. As investors, we're always looking for stocks that have upside, opportunities that have upside. So, Tim Byers, what's one industry that you think has good upside potential in 2012? Mobile computing. I think usage patterns are changing so that there's no such thing as a smartphone anymore. I wrote about this recently. It's not that I think smartphones are dead. I think the term smartphones is dead. I don't think of an iPhone as a smartphone. I think it's just a phone. You look at the number of phones that are out there that have advanced functions,

calling that a smartphone just doesn't make sense anymore. The smartphones are the standard for phones now. Similarly, when you look at tablets, I'm seeing a lot of companies providing tablet apps, a lot of work in a technology standard called HTML5 so that a web page can be as interactive as software that you would load onto a device. And that has the net effect of, say, your iPad, you can go to what Salesforce.com is doing in 2012. They're going to have a site called touch.s.com. And so you're going to be able to get access to everything you do in Salesforce, all of the

advanced functions from any device, whether it's on your smartphone or your tablet, your computer, what have you, anything that's touch-sensitive, and everything will be consistent. I think that changes usage patterns. There's some statistics that say TV watching is going up, in part because people aren't spending more time on the couch. They're spending more time watching TV on tablets. I think that's remarkable. Are there any surprising winners in this market? Are there surprising winners?

I don't know that they're surprising, but I think if an investor wants to make a best, that isn't obvious for the purpose of trying to get a little more upside. Look at the components. Look at a company like Qualcomm, Q, C-O-M that is making chips, very comprehensive chips for enabling a lot of these features. Another one might be Cypress Semiconductor, which is the ticker CY, which does multi-touch functions, but they put it all on a chip, a little controller, so that you can take your two fingers and mimic a lot of the functions.

you would otherwise need a keyboard for. So those are stocks that are a little hidden, but are very interesting and really play into this trend. Matt, what about you? What's one industry you're watching in 2012? Well, I'm a value guy, so I tend to look at things that other people are hating on. And so I'm looking at banking right now. Oh, the poor banks. Nobody loves them. And when I think banking, I'm thinking primarily for people to be looking at the regional banks, the really boring regional banks, to think like M&T banks, BB&T, TNC.

I mean, these are banks where the business will put you to sleep. It's like watching paint dry. But in terms of the ability for these guys to kind of slowly build their way back from the disasters of 2008-2009, I think there's a lot of good potential there. All right, we've just got a little bit of time left. Give me a few stocks that are on your watch list for 2012, regardless of industry. Tim Byers, I'll start with you. I'll give you three.

Apple, the numbers on the iPhone. If it hits the upside target that analysts are looking for, 190 million iPhones sold in 2012, that will equate to more revenue just on the iPhone than Apple generated in fiscal 2011. It's remarkable. NetSuite, which is a ticker N, which is a ticker N, which is, kind of Salesforce.com light, but it doesn't touch customers. It touches the back end of boring stuff, managing accounting. A lot of companies like it, and venture capitalists are

increasingly telling companies not to spend on buying capital equipment like servers, just use the cloud that really plays into NetSuite's market. And I'll go one social media stock, LinkedIn. I think if you look at the pricing that LinkedIn is able to command, it's remarkable. They have had, what's interesting is how Netflix, Netflix had the sort of a revolt when they raised prices. LinkedIn charges hundreds of dollars annually for subscriptions to some of its most valuable data, and people are paying it, and the growth is accelerating. So there hasn't been this chilling Netflix effect on higher prices at LinkedIn. I think that's an incredibly bullish sign.

The valuation is very high. I recognize that. But again, when usage patterns change, I think that's a very bullish indicator, and that seems to be the case with LinkedIn. Matt, what do you got for stocks on your watch list? I've got three as well. I'll go Berkshire, which is just a tremendous collection of businesses and the price is right now.

Arsula Mittal, which is one of the premier steelmakers worldwide, really well-run company, been whipsawed by Europe, but I think has a good feature ahead of it. And let's go with Bank of America. This is just a flyer here. It is so, so beaten down. It's basically something terrible is going to happen to this bank or investors are going to make a lot of money. It's kind of a lottery ticket down. All right. Matt Coppenhefer, Tim Byers. Guys, thanks so much for being here. Thanks, Chris. Thanks, Chris. Coming up, an encore presentation of our interview with Louis Ferranti. Stay right here. You're listening to Motley Full Money. Welcome back to Motley Full Money. I'm Chris Hill. Forget Harvard Business School. My guest

this week says, you want to learn about business? Study the mafia. Louis Ferranti is a former insider with the Gambino family. And after spending eight and a half years in prison, he is now an author and motivational speaker. His latest book is Mob Rules, What the Mafia can teach the legitimate businessman. And he joins me now. Lewis, thanks so much for being here. Thanks for having me, Chris. I'm happy to be on your show. I want to talk about the book in a minute, but first, let's start with your own experience. What was your role in the Gambino family, and what was the primary business of the Gambino family? Well, the primary business stands to making money.

I kind of had, I guess you could say I shared three different roles at one time, which was a guy who makes money, manager, down to my crew and company within the family. No, you answer to the franchise. Wow, it's amazing. I guess I never thought of the mafia as having middle managers. I just think of that as sort of like, you know, office parks out somewhere have middle managers. Yeah, the middle managers are usually like coppersed for them. But yeah, it's a consular.

And in terms of your own operations for your own little business, you were, among other things, hijacking trucks, weren't you? I was the guy, the family thing. I had a like to take down, a heist, a truck hijacking, a vault, whatever it might be. If you think about it, just imagine how funny you. So you end up eventually going to prison, and what changed for you in prison? How does a guy go from being an elite performer for a mob family to becoming an author of multiple books? What opened up in a prison cell, and I saw that is, you know, there is that, but there is still violence involved.

So that was the moral question, but aside from that, with all the snitches turning bad and sending, you know, where was I going with this? I said, hey, am I going to come out of the way again? And maybe next time they'll try to do this time. It's a change like anybody can in any field. It's like somebody who's maybe going in the real world and they may leave their country and try it on their own. It's probably what I did. So when you're on the inside, you make this decision to sort of turn your life around, what leads you to the world of writing?

Noosal, nothing to do but a pen and paper. You're the caretaker of John Gotti's South Queen Social Club. John Gotti was the big and he was the caretaker of the club and he had all these tattoos on his body and some of the tattoos were biblical verse. I had the knowledge to put these biblical verses on him. So I called him up and asked him, did you get these

ideas? Did you tell him he said, I told he was short and bossy. With that, he said, you three dictators, the beginning of my reading, my love of reading, reading more and more books, I started 20 hours a day in a cell, wanted to do. So, I'm a writer, how old century novels, notes as I was reading, and that's

I taught myself out of write. You're listening to Motley Fool Money. I guess this week is Lewis Ferranti, author of the new book, Mob Rules, What the Mafia Can Teach the Legitimate Businessman. Before we get to a few of the rules, a couple of questions about the mob itself. In what industries is the mafia most prevalent? I would say that they're losing their stronghold on a lot of the major industries that they once did hold. When I was coming up in the mob, a lot of the old timers had control. of the peers and the seaports. They had control of the Garmin Center. I've been cleaning a lot of

that stuff. So today, I mean, today they're probably grasping on to a few unions now. You know, I've been out of that life since I came home from prison. I went straight. I'm a writer now. But from what I understand, they have a, you know, it's very, very big for that. So, you know, they're still there. But now at the Motley Fool, when we're looking at businesses and industries, one of the questions we like to ask as investors is, what's the opportunity here for this company. So you know, you say they're losing their stronghold. What is the big opportunity for the mafia these days? I would say that it's the opportunities that are at, maybe. I think that'll last fear as a stop, almost like a... You're listening to Motley Full Money, our guest this week.

Louis Ferranti, author of the new book, Mob Rules, What the Mafia can teach the legitimate businessman. Let's talk about the book. I want to spot you up with some of the business lessons in the book and have you elaborate on them. Let's start with one, which is get your own coffee. An example in that chapter, that's a real prime example. I mean, there were a number of examples that popped in my head. The full chapter title is respecting the chain of command without being a sucker. And that's go get your own coffee. Here in the mob, there's a chain of command. And obviously, you taught to respect your elders, and you must follow that chain of command. And you can't spend your day making coffee for the boss.

You're never going to go anywhere. Rappuccino. It's an example in which a high-ranking Gambino. He met me really on the street. There's a lot of you iron my pants for me, and I said I paid somebody to him. So he asked me again, and because of his high-rank, and he was respect. I guess he thought because I was a Gambino guy also crumple him up into a ball, got the message.

I'm not here serving. I'm not here facing the rest of job easily. He never had worries about the FBI. So he laughed and in the end, to make sure he was my friend, I used my connections at the prison laundry to get him a brand new uniform, shook his hand, smiled, and he gave me tremendous respect after that. And he would never ask me to do a menial task again. So there are ways in the corporate world where if a boss is abusing you and sending you for coffee every day at Starbucks, you could let the boss, you know, get the message in a funny way. Coming up, more mob rules with Louis Ferranti. Stay right here. This is Motley Full Money. You're listening to Motley Fool of Money.

Our guest this week, Louis Ferranti, author of the book, Mob Rules, What the Mafia Can Teach the Legitimate Businessman. Another rule from the book, don't build Yankee Stadium, just supply the concrete. When the mob operates, and you were asking earlier about that they once controlled, maybe years ago, the mob was a huge contract to build Yankee Stadium. Now, being that the major things are taken away from, they still have that predatory. They may see, they may look at Yankee Stadium as, gee, maybe we can. can't get the major contract to build a stadium.

A hundred thousand stadium needs that we could sit in a coffee shop if they were in the Bronx. This is out. Well, we could stop by opening up sausage jet there and hot dogs to street contracts. Then we could get, oh, there's flag poles. I know a guy Bobby flagpole. He sells flagpoles. I'll get the flag to get them cheap enough.

We could get the contract for flagpoles. The sign. Oh, I know Johnny signs. Johnny signs make signs over in Brooklyn. Maybe we could make the Y, the A, the N, the K, stadium sign. really, really attack. And there might be, there might be areas of the, turn their nose up that, and the mob will run into. You know, a mobster might say, I could supply the urinals. Let me do the, let me get the bathroom contract. All I need is the urinals, and I'll have a $4 million

dollar contract just putting the urinals in. You know, so this is what the mob does, and they really, really then work hard at getting anything used in that stadium. It's huge in the mob. every mobster has it. Another lesson from the book, which is near and dear to my heart, certainly my favorite film of all time, and the lesson is leave the gun, take the canoli, and beware of hubris. I started out with leave the gun, take the canolis.

When I left the mob for the violence, each other, you know, there were a number of mobses. The examples I used was a national leader. He was a good boss, but he had a lot of character for it by being so flashy and causing so much attention. We're going to wrap up with a round of buy-seller hold, and let's start with this faces more and more competition. Buy-seller Hold, the future of Atlantic City.

Just briefly? People still like a place again, but they're in their prime rib dinner that they can't get in their living room. That nice Romeo and Juliet, not going to get that in your living room. But then again, you're going to lose a lot of people. See where it goes. It's a new TV show on VH1 following some women affected by the mafia. Buy-Seller Hold, Mob Wives.

I'm going to go by the many country who've read my tremendous, my fan mails have been inundated with people say sell. Fair enough. And finally, The Hurricane is an Oscar-nominated film about a tough guy who becomes a writer in prison. Buy-seller-hold, a movie based on the life of Louis Ferranti. Buy. Put all your money on it. And, I mean, you get to cast it.

Who are you picking to play you? It might be some. It was 20 years ago when I was running around on the streets. Been seen yet. I don't even like to think about it. I'll tell you the truth until I get that phone call. But this book is already by a major actor and how I would buy. There has been some interest.

The book is Mob Rules, What the Mafia Can Teach, the Legitimate Businessman. It's just out this week. It is available everywhere. Pick up a copy. It is great stuff. Lewis Ferranti. Thanks so much for being here. Thank you so much, Chris.

I had a great time with you. That's all for this week. On behalf of everyone here at the Motley Fool, we hope you have a safe and happy holiday season. Coming up next week, it is our 2012 investing preview. We will talk about the big questions facing investors, which corporate battles we're going to be watching, and the stocks that are on our radar heading into 2012.

No guess next week. We've got two full panels of Motley Fool analysts and advisors, There's a lot of stock ideas, so you don't want to miss it. That's our 2012 preview coming next week. That's all for this edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill.

Thanks for listening. We'll see you next week.