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The calls to the White House come at least once a week. “Murdoch here,” the blunt, accented voice on the other end of the line says.

For decades, Rupert Murdoch has used his media properties to establish a direct line to Australian and British leaders. But in the 44 years since he bought his first newspaper in the US, he has largely failed to cultivate close ties to an American president. Until now.

Murdoch and President Donald Trump – both forged in New York’s tabloid culture, one as the owner of The New York Post, the other as its perfect subject – have travelled in the same circles since the 1970s, but they did not become close until recently, when their interests began to align more than ever before.

Since Inauguration Day, Murdoch has talked regularly with Trump, often bypassing the White House chief of staff, General John F. Kelly, who screens incoming calls. Murdoch has felt comfortable enough to offer counsel that others may shy away from, such as urging the president to stop tweeting and advising him to improve his relationship with Secretary of State Rex Tillerson. Murdoch also has weekly conversations with Trump’s son-in-law and senior adviser, Jared Kushner.

Before the news broke that Murdoch had agreed to sell vast parts of his 21st Century Fox to the Walt Disney Co. for US$52.4 billion ($67.8 billion), Trump called him to get his assurance that the Fox News Channel, the highly rated cable network and frequent bullhorn of the Trump agenda, would not be affected.

On December 14, the day the agreement was announced, Trump let the world know that he had made a congratulatory call to Murdoch. Sarah Huckabee Sanders, the White House press secretary, also passed along the president’s belief that the deal would be “a great thing” for jobs – a claim disputed by Wall Street analysts.

After decades of ups and downs, Trump now counts Murdoch as one of his closest confidants. The two titans made a show of their improved relationship in June 2016, when Murdoch visited Trump at the Trump International Golf Links Scotland before a group of reporters. They appeared together again at a black-tie dinner in May in honour of American and Australian veterans who fought side by side in World War II. Murdoch introduced the president as “my friend Donald J. Trump” before they engaged in a brief hug.

They are opposites in personal style, with Murdoch gruff and low-key, preferring schlubby newsrooms to Trump’s gilded towers and glitz. But they have much in common.

Both were born to wealth, but at a distance from the centres of power. Trump grew up in Jamaica, Queens, the son of a real estate developer content to earn his fortune in the boroughs outside Manhattan –  so close but so far from glittering Midtown, where the son would make his name and his home. Murdoch, the son of a journalist who became the owner of a newspaper chain, spent his childhood in Melbourne. Murdoch, 86, and Trump, 71, are also alike in that they were both sent to exclusive schools as boys before going on to outdo their fathers in the family businesses.

Although both men parlayed their inheritances into global power, they have stubbornly viewed themselves as outsiders at odds with the establishment. When Murdoch entered the British newspaper market in 1968, London society shunned him and his vulgar tabloids, The Sun and The News of the World, which he used to wound his enemies and advance his political interests. Trump withstood a similar wariness among the elite after he made himself a Manhattan player through his brazen deal making and hucksterism.

To make their way upward in New York, both men relied on a powerful friend, lawyer Roy M. Cohn, a ruthless fixer who made his name in the 1950s as the chief counsel to Joseph McCarthy, the Red-baiting senator, before representing some of the city’s most powerful figures, including the mobster John Gotti and the New York Yankees owner George Steinbrenner.

Cohn connected Trump to Murdoch and the tabloid he bought in 1976, The New York Post. The upstart developer saw that he could benefit from the brash daily – especially its Page Six gossip column, which started a year after Murdoch became the paper’s owner.

“Trump was interested in specifically Rupert’s ownership of The Post, because Page Six is very important to his rising stature in New York City and branding efforts,” said Roger Stone, a Republican operative who has known both men for decades.

Trump seemed to revel in the tabloid’s saucy coverage of his personal life. In 1989 and 1990, The Post turned out a series of front pages on Trump’s split from his first wife, Ivana Trump, and his affair with Marla Maples. The stream of headlines in bold block letters culminated in a quote attributed to Maples: “Best Sex I’ve Ever Had.”

Trump’s enthusiastic response to the planned Disney-Fox megadeal may have been lost in the swirl of Washington news had it not been for his vehement opposition to another recent attempt at media consolidation – AT&T’s proposed US$85.4 billion ($110 billion) acquisition of Time Warner, the parent company of CNN, a frequent target of the president’s “fake news” complaints. While so far making no move on the Disney-Fox plan, the Justice Department has sued to block the AT&T-Time Warner deal on antitrust grounds in a rare instance of governmental interference in a merger of two companies that do not directly compete with each other.

Murdoch, whose ideology is more malleable than his critics realise, has long gained from his knack for placing himself close to power. In the 1980s, when he was cosy with Prime Minister Margaret Thatcher, his London tabloids took a pro-Tory stance. In 1997, his newspapers endorsed the Labor Party leader Tony Blair for prime minister.

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Lance Price, a former Blair spokesman, referred to Murdoch as “effectively a member of Blair’s Cabinet.” In turn, Murdoch faced little government scrutiny as he expanded his media empire to reach 40 percent of British newspaper readers and millions of television viewers through his stake in Sky, a pay TV service. But after a 2011 phone hacking scandal at the now-shuttered News of the World put a spotlight on his remarkable political influence, he found himself facing regulatory hurdles, and his $15 billion bid for a 61 percent stake of Sky came to nothing.

Even as Murdoch enjoyed an open invitation to 10 Downing Street, he found that his overtures to U.S. presidents mostly fell short. And before making their alliance, Murdoch and Trump had to put their old spats behind them.

Before the recent rapprochement, Murdoch privately called Trump “phony,” and accused him of exaggerating his net worth. For his part, Trump once threatened to sue Murdoch for libel after The Post reported that the storied Maidstone Club in East Hampton, New York, had denied him membership.

During much of the 2016 presidential campaign, Murdoch – who initially swooned over Jeb Bush – stood against Trump, declaring on Twitter that he was “embarrassing his friends” and “the whole country.” The Wall Street Journal, Murdoch’s crown jewel, ran an editorial calling the candidate a “catastrophe”.The Post led with the headline “Don Voyage” and declared, “Trump is toast”.

Trump shot back on Twitter: “Wow, I have always liked the @nypost but they have really lied when they covered me in Iowa.” He also went after the Journal: “Look how small the pages have become @WSJ,” he wrote. “Looks like a tabloid ??? saving money I assume!”

The Post ended up endorsing Trump, with reservations, in the New York primary, but refrained from endorsing either him or Hillary Clinton in the general election.

More recently, Murdoch expressed exasperation with Trump’s immigration policies. In response to the White House ban on travel of people from majority-Muslim nations, his company, 21st Century Fox, released a memo offering assistance to any employees hurt by the executive order and reminding them that “21CF is a global company, proudly headquartered in the U.S., founded by – and comprising at all levels of the business – immigrants.” In August, James Murdoch, the younger son of Murdoch and the chief executive of 21st Century Fox, condemned the president’s response to the riots in Charlottesville, Virginia.

The man partly responsible for the detente was another moneyed outsider who craved status and respect: Jared Kushner.

When Kushner bought The New York Observer in 2006, he wasted little time reaching out to Murdoch. “He wanted to be Murdoch,” said one person close to both men at the time. In early 2016, after a presidential debate during which Trump faced aggressive questioning from Megyn Kelly, then a Fox News anchor, the candidate sent Kushner to Murdoch on a media diplomacy mission.

Kushner’s wife, Ivanka Trump, is close friends with Murdoch’s third wife, Wendi Deng. Murdoch and Deng attended the Kushner-Trump wedding in 2009 at the Trump National Golf Club in Bedminster, New Jersey, and the Murdoch daughters, Grace and Chloe, served as flower girls.

Before Murdoch and Deng divorced in 2013, Kushner and Ivanka Trump vacationed on Rosehearty, Murdoch’s 184-foot sailing yacht. In a further sign of the two families’ closeness, Ivanka Trump took on the job of Murdoch trustee responsible for overseeing the two girls’ $300 million fortune – a role she gave up a month before her father took office.

In June 2016, when Donald Trump appeared to be the inevitable Republican nominee, Murdoch made the visit to Trump International Golf Links Scotland. Completed in 2012 over the objections of nearby residents, the course lies 35 miles from the herring-fishing port of Rosehearty, the town left behind by the Murdoch clan when it emigrated to Australia in 1884.

Murdoch arrived with former model Jerry Hall, his fourth wife, whom he married in March. Under cloudy skies, the newlyweds toured the property in a golf cart large enough for four. Trump was at the wheel, with Hall seated beside him. Murdoch, wearing sunglasses, sat on a backward-facing rumble seat as they made their way to the Trump-refurbished Macleod House, a 15th-century mansion, where they had dinner.

Trump’s mended relationship with Murdoch has not gone unnoticed by Time Warner executives, who wonder why AT&T’s attempt to buy the company has run into regulatory trouble at a time when the president has smiled on the Disney-Fox deal.

“If you look at the facts of our case, even before you heard the administration’s endorsement of the Disney-Fox deal, it was hard to understand how the Justice Department could reach a decision to block our deal,” Jeffrey L. Bewkes, the chief executive of Time Warner, said.

A spokesman for the White House, Raj Shah, said that Trump hadn’t spoken to Attorney General Jeff Sessions about the AT&T-Time Warner deal and that “no White House official was authorised to speak with the Department of Justice on this matter.”

The way CNN’s parent company views it, Fox News has adopted a role similar to the one played by Murdoch’s British tabloids when they helped advance the agendas of British leaders. As Blair learned, however, even a special relationship with the media baron can sour quickly. He and Murdoch – once so close that Blair was the godfather to Grace Murdoch – are no longer on speaking terms.

During the British government’s 2012 inquiry into the mogul’s political influence, the former prime minister described what it was like when a story subject falls out of favor with a Murdoch-controlled tabloid.

“Once they’re against you, that’s it,” Blair said. “It’s full on, full frontal, day in, day out, basically a lifetime commitment.”

Henry Sapiecha

 

bitcoin images www.acbocallcentre (1)

Reinventure has taken a stake in Bitcoin company Coinbase, which has 2.3 million users and 3 million digital “wallets”. Photo: Bloomberg

westpac logo image www.money-au.com

In a deal that will put Westpac Banking Corp in the box seat as cryptocurrencies develop, the bank’s venture capital fund, Reinventure Group, has invested in Coinbase, one of the world’s pre-eminent Bitcoin companies.

In the first deal involving an Australian bank and a Bitcoin company, it is understood that Reinventure joined a $US75 million raising Coinbase conducted earlier this year, which also won support by some of the world’s largest venture capital firms, the New York Stock Exchange and former Citigroup CEO Vikram Pandit.

Backers of Coinbase are making bets that blockchain technology will radically transform the movement of money around the globe’s financial system. The investment by Reinventure will allow Westpac to monitor a future world where money morphs beyond central bank-regulated currencies into a myriad of forms.

“We plan to work closely with Reinventure and share insights into the use of digital currencies globally,” the San Francisco-based Coinbase said in an announcement on its blog on Tuesday morning. A spokesman for Westpac confirmed the investment. Coinbase’s “mission is to be the most trusted bitcoin company in the world and it is investing heavily in next generation security. Reinventure’s investment will provide key insights into the use of digital currencies and associated technologies,” the Westpac spokesman said

Coinbase provides a range of services to the Bitcoin economy. These include allowing customers to exchange domestic currencies into Bitcoin and transfer payments in Bitcoin, storing Bitcoin in a digital wallet and providing merchant services to process transactions for companies dealing in Bitcoin. It also operates an exchange where speculators can bet on direction of price of bitcoin, and various anti-money laundering and security services.

The company has been seeking to legitimise Bitcoin which has been plagued by volatile moves in its price, the high-profile theft of some Bitcoin from an exchange in Japan, and its use in the blackmarket economy. Coinbase has been working with regulators in the US and the UK to create legal frameworks under which it can operate.

Earlier this month, US regulator Benjamin Lawsky released a final version of Bitcoin regulations known as a BitLicense which will require digital currencies businesses in New York state to operate with a license and report to government. The Reserve Bank of Australia has conducted detailed analysis of Bitcoin and its implications. A Senate Committee is also preparing a report on digital currencies due for release this year.

Reinventure joined in the recent “Series C” fundraising round venture capital powerhouses Draper Fisher Jurvetson, Andreessen Horowitz, Robbot Capital  and Union Square Ventures, all of which had participated in previous Coinbase raisings. As well as the NYSE, the raising was Japan’s largest mobile phone operator NTT DoCoMo, USAA Bank, the venture arm of Spain’s BBVA, Mr Pandit and former Thomson Reuters CEO Tom Glocer.

It is believed the participation of USAA, BBVA and now Westpac represents the first time any global financial institutions or their VC funds have invested in Bitcoin. No amounts were disclosed, however, it is understood that each party put in between $US1 million and $US10 million into the raising, which was completed in January.

Coinbase allows users to buy and sell Bitcoin in 25 countries and is focused on expanding to 30 by the end of the year. “We look forward to working with Reinventure and bringing bitcoin to new markets around the world,” the company said.

Reinventure Group co-founder Simon Cant said: “We’re very excited to be working with such a great management team and look forward to helping them grow their business.”

According to Coinbase’s website, it has 2.3 million users, serves 3 million digital “wallets”, is used by 40,000 merchants and has 7,000 developer applications. Wallet growth grew by 10 times in 2014, the company has said.

The deal comes after Westpac, Australia and New Zealand Banking Group and Commonwealth Bank of Australia begin testing out payment technology from US-based company Ripple Labs, an exchange for messages that is being targeted towards banks. The Ripple network uses similar blockchain-style technology to Bitcoin, which it calls a ledger, but is a distributed network rather than a decentralised one.

Westpac seeded Reinventure – which is managed independently – with $50 million in February last year. It has made four previous investments: marketplace payments provider, PromisePaybig data analytics firm Zetaris Corporation; Australian local community social network Nabo; and the peer-to-peer lender SocietyOne, which is also backed by media moguls James Packer, Lachlan Murdoch and Ryan Stokes.

ooo

Henry Sapiecha

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1. (60 globally) Vladimir Potanin – [Russia] – $15.4 billion ($12.6 billion in 2014)

Potanin has shot up the rankings from last year, being one of the few miners to come out ahead despite the downturn. Last year he was ranked 86th globally, and only at number 7 in regards to mining.

He is now also the richest person in Russia.

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2.(71 globally) Alisher Usmanov – [Russia/Uzbekistan] – $14.4 billion ($18.6 billion in 2014)

Usmanov has been unseated from his top position last year after recording a 22 per cent drop in his wealth year on year. He also slipped significantly in global rankings, after coming in 40th last year.

This also means he is now no longer the richest person in Russia, slipping to third.

Usmanov, like many Russian and former Soviet oligarchs, built his fortune in mining operations.

He runs USM, holding 100% voting rights in the company, and is the co-owner of Metalloinvest, which owns metal and mining businesses such as Lebedinksy GOK and Ural steel mills.

Usmanov also holds a large stake in underwater mining company Nautilus Minerals, which holds exploration tenements off Papua New Guinea.

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3.(77 globally) German Larrea Mota Velasco  – [Mexico] – $13.9 billion ($14.7 billion in 2014)

Velasco has recorded the third consecutive drop in his revenues year on year, although his wealth stating relatively stable compared to the rest of the sector, which contributed to his rising in the rankings from 6th to third for mining, although he did fall from 67th to 77th globally.

German Lerrea Mota-Velasco is the head of Grupo Mexico, the largest mining corporation in Mexico and the third largest copper producer in the world.

Through its subsidiary, Southern Copper, it has the largest copper reserves in the world

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4. (82 globally) Iris Fontbana – [Chile] – $13.5 billion ($15.5 billion in 2014)

In a similar fashion to Velasco, a relatively small drop in wealth has seen Fontbana retreat down the global list from 58th last year, but actually ascend the mining list from 5th position in 2014.

Iris Fontbona is the widow of Antonio Luksic, who is the founder of the Luksic Group.

Similar to GroupoBAL, Luksic holds a number of interests in different areas, but predominantly in mining. The group has major holdings in Antofagasta, the UK listed copper miner.

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5.(82 globally) Lakshmi Mittal – [India] – $13.5 billion ($16.7 billion in 2014)

The only Indian on the list, Mittal’s fortunes have been hit particularly hard, with his wealth more than halving in the last four years.

Mittal came in third for mining, and 52nd globally last year.

Mittal is the chairman and CEO of ArcelorMittal, the largest steel manufacturer in the world.

He opened his first steel mill in Indonesia at the age of 26 and has gone from strength to relative strength since.

Coming off a high of $31.1 billion in 2011, Mittal has seen his fortunes dwindle as the demand for steel shrinks.

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6.(89 globally) Alexei Mordashov – [ Russia] – $13 billion ($10.5 billion in 2014)

Mordashov is another Russian who has fared well over the last year in spite of the spiralling rouble. Last year he snuck into the list in 10th place, and sat at 111th, globally.

Like a number of Russian and East European billionaires, Mordashov made his money during the break-up of the Soviet Union.

Whilst working for Cherepovetsky Metallurgical Plant he bought a major stake in the factory when it was privatised. He later became a general director of the business and went to build the conglomerate Severstal, acquiring coal and mining companies. His wealth grew in spite of the  selling off his North American steel plants to the Renco Group for $1.2 billion, less than half of what he paid for them only three years ago.

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7.(94 globally) Gina Rinehart – [Australia] – $12.5 billion ($17.7 billion in 2014)

The only Australian on this list, Rinehart’s fortunes have slipped significantly, by close to a third, in the wake of the tumbling iron ore price. Last year she came in second for mining, and 46th globally.

Despite this she is still Australia’s richest person.

While many believe Gina inherited much of her wealth from her father’s company and operations through Hancock Prospecting, when she assumed the chair of HPPL the company was actually found to be in serious debt.

According to the company “much of Rinehart’s wealth has been generated since her executive chairmanship commenced in 1992″.

This was done through the development of the Hope Downs iron ore project, the acquisition and development of the Roy Hill project, and its Queensland coal interests,” which all took place under Mrs. Rinehart’s executive chairmanship,”Hancock Prospecting said.

The company owns swathes of extremely prospective iron ore tenements throughout the Pilbara, which is now being transformed into the massive Roy Hill mine.

Rinehart also shares in the profits generated by the Hope Downs mine, and also has major stakes in the Alpha Coal and Kevin’s Corner coal project in the Galilee Basin.

A heavily dramatised version of her life recently appeared on T.V., of which we will say no more.

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8. (107 globally) Vladimir Lisin – [Russia] – $11.6 billion ($16.6 billion in 2014)

Lisin has dropped down the rankings dramatically, falling from fourth in mining, and 53rd globally, last year.

A Russian steel tycoon, Lisin a one of the world’s leading authorities on metallurgy, and holds a number of patents on metallurgical processes.

In a similar vein to Australia’s own Nathan Tinkler, (although much more successful) Lisin started at the bottom, working as a mechanic at a Soviet coal mine, working his way through the ranks to become a deputy chief engineer.

Thanks to tenacious trading, which gained him a large share of the nation’s steel and mining industry following Soviet collapse, eventually becoming the sole owner of Novolipetsk Steel in 22000.

He has been a director of Norilsk Nickel since 2002.

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9.(121 globally) Alberto Bailleros Gonzalez – [Mexico] – $10.4 billion ($12.4 billion in 2014)

Demonstrating the fading fortunes of many mining magnates, while Gonzalez has remained stable at ninth position on the mining billionaires list, he has dropped significantly down the global list, falling from 90th last year.

Gonzalez owns a holding company called GroupoBAL, which amongst other things runs Penoles, which is the world’s largest producer of refined silver and bismuth, as well as Latin America’s largest producer of lead and zinc.

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10.(125 globally) Wang Wenyin – [China] – $9.9 billion

Wenyin is a newcomer to the mining top ten list, and the only Chinese citizen.

He has charged up the global rankings, rising from 354th last year to his new position just outside of the top 100, demonstrating the significant newfound wealth in China.

He is the chair of the Amer International Group. Which produce cable and copper products, and holds interests in a number of copper mines based in China’s Jiangxi Province.

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OOO

Henry Sapiecha

James Packer n suit image www.acbocallcentre.com

‘I am extremely happy with RatPac’s progress’ … James Packer is expanding his production company’s film and entertainment business in the US, China and Asia. Photo: Darrian Traynor

James Packer has cemented his position as a Hollywood player after securing almost a quarter of a billion dollars in backing for his Los Angeles-based production partnership, RatPac Entertainment.

The company, which Packer created a year ago in partnership with filmmaker Brett Ratner, has closed a deal with Bank of America Merrill Lynch for a credit facility worth $US150 million ($169.54 million).

RatPac says it now has a total capitalisation of up to $US225 million ($254.3 million).

The company, with Dune Entertainment, announced a multi-year agreement with US studio Warner Bros in 2013 to co-finance as many as 75 films.

The Alfonso Cuaron film Gravity was one of the early financial beneficiaries of that agreement.

It went on to gross more than $US700 million ($791.17 million) at the box office from a $100 million ($113 million) budget.

Another film backed by the fund was The Lego Movie, which has grossed almost half a billion dollars off a budget of $US60 million ($67.81 million).

Though Bank of America Merrill Lynch is the sole agent in the new RatPac deal, it represents a syndicate of American banks, including Atlanta’s SunTrust Bank, the Beverly Hills headquartered City National Bank and the Japanese-owned Union Bank.

“I am extremely happy with RatPac’s progress,” Packer said in a brief statement.

“The company is quickly expanding its film and entertainment business in the US, China and Asia.

“This credit facility is critical to RatPac’s key partnership with Warner Bros and we will continue to work hard to deepen and strengthen this relationship in the future.”

RatPac’s partner, Dune Entertainment, is owned by Steve Mnuchin, the founder of OneWest, a California-based regional bank, and the investment company Dune Capital Management.

When the RatPac-Dune-Warner Bros deal was announced in 2013, the studio’s Chief Executive, Kevin Tsujihara, said it gave the studio “increased strength and flexibility … and an even greater ability to manage risk.”

Henry Sapiecha

Bill Gates is hardly the typical billionaire. His $91.96 billion fortune is a tad over the typical billionaire’s kitty of $3.49 billion. image www.acbocallcentre.com

Bill Gates is hardly the typical billionaire. His $91.96 billion fortune is a tad over the typical billionaire’s kitty of $3.49 billion.

What does a “typical” billionaire look like in the year 2014? The annual Wealth-X and UBS Billionaire Census, which gives an in-depth accounting of the world’s wealthiest people, devotes an entire section to answering this question. Here are a few points:

• The typical billionaire has a net worth of $3.49 billion ($US3.1 billion)

• The typical billionaire is 63 years old. (It was 62 last year.)

• The typical billionaire has nearly half of his or her wealth in ownership of privately held businesses.

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The typical billionaire owns four properties worth some $106.05 million altogether.

Want to break it down further? According to the survey, there are a record 2,325 billionaires in the world today, up 7 per cent from the previous year. Their total wealth increased 12 per cent in the same period to $8.23 trillion, which is equal to 4 per cent of global wealth and greater than the combined market capitalisation of all the companies in the Dow Jones Industrial Average. As might be expected, men account for 2,039 of billionaires worldwide (or more than four in five) and $7.22 trillion of their combined wealth.

With $77.38 billion to his name, Warren Buffet is the world’s second richest person image www.acbocallcentre.com

With $77.38 billion to his name, Warren Buffet is the world’s second richest person. Source: News Limited

Billionaires also have what the Wealth-X/UBS report charmingly refers to as a “billionaire network.” The typical billionaire has “business or personal relationships with another nine UHNW [ultra high net worth] individuals, three of which are billionaires,” it notes. That means the typical billionaire has a friend circle worth an estimated $18.05 billion. The “must-go” events on their social calendar, according to the report, include sporting events (particularly the U.S. Masters and PGA Championship), the Davos World Economic Forum, and various elite art shows (a good deal of which are sponsored by UBS).

Should you wish to track down a billionaire, you’re best off looking in New York, home to 103 billionaires — ahead of the runners-up, Moscow (85) and Hong Kong (82). You could also try crashing an alumni event at the University of Pennsylvania, which counts 25 billionaires among its graduates (Harvard and Yale are close behind). In terms of regions, Europe still has the largest number of billionaires, as you can see in the map from Statista below, and tiny little Liechtenstein boasts the highest number of billionaires per capita, at five.

Henry Sapiecha

Chinese billionaire philanthropist Chen Guangbiao selling canned air in 2013 image www.acbocallcentre.com

Chinese billionaire philanthropist Chen Guangbiao selling canned air in 2013

Shanghai: A Chinese billionaire has announced plans to invite 1000 impoverished Americans for a meal in Central Park in an attempt to show fellow tycoons that there is more to life than “luxury goods, gambling and prostitution”.

Chen Guangbiao, a recycling magnate from the eastern province of Jiangsu, issued the invitation to his “charity luncheon for 1000 poor and destitute Americans” through two prominent advertisements placed in The New York Times and The Wall Street Journal this week. Guests will be given $US300 to spend on “occupational training” as well as lunch at the Loeb Boathouse restaurant in Manhattan’s Central Park.

The restaurant, which featured in the 1989 film When Harry Met Sally, describes itself as “the ultimate urban oasis” and “a haven for romantics and nature lovers”.

Mr Chen said he hoped that the lunch, which he expected to cost about $US1million, would boost relations between China and the United States and change perceptions of wealthy Chinese.

“I want to spread the message in the US that there are good philanthropists in China and not all are crazy spenders on luxury goods,” he told Hong Kong’s South China Morning Post.

The tycoon, whose past stunts include selling canned air to raise awareness of pollution and smashing a Mercedes Benz to draw attention to global warming, also hoped to serve as a role model for Chinese billionaires.

He said: “There are many wealthy Chinese billionaires but most of them gained their wealth from market speculation and colluding with government officials while destroying the environment.

“I can’t bear the sight of it, because all they do is splurge on luxury goods, gambling and prostitution and very few of them sincerely live up their social responsibility.”

It was not immediately clear whether Mr Chen’s guests would be offered a set menu at the Central Park feast or be allowed to choose from the restaurant’s a la carte lunch menu, which features dishes such as Lemon-Oregano Crusted Salmon and Yellowfin Tuna Sashimi with Tobiko Caviar and Jalapeno Wasabi Vinaigrette.

In a 2010 interview with The Daily Telegraph, Mr Chen said he hoped to build a “charity army” of wealthy Chinese business people who would pump large chunks of their profits back into society.

Telegraph, UK

Henry Sapiecha

THE RICHEST MAN IN THE WORLD OF MINING FILES FOR BANKRUPTCY

Batista files for bankruptcy

Once the richest person in the world of mining Brazilian tycoon Eike Batista’s flagship company has filed for bankruptcy protection.

Reuters reports Batista’s oil and gas explorer OGX applied for “judicial recovery” as the process is known in Brazil after debt restructuring talks with holders of $3.6 billion in bonds ended with no agreement.

The bonds are part of $5.1 billion distressed debts at the company and OGX’s demise is Latin America’s largest corporate default in history.

The rise of his empire built on the commodities boom was nothing if not spectacular.

He started out with small-scale gold mining in the Amazon before graduating to the big leagues with gold, iron ore, oil & gas, shipping, energy, construction and sports promotion companies.

OGX was set to give credence to Batista’s publicly stated goal of becoming the richest person in the world.

Batista founded OGX, one of five public companies controlled by the flamboyant Brazilian, only in 2007 with $1.3 billion raised from private investors.

His fortune topped out at an eye-watering $32.8bn in April last year after OGX struck oil off the Brazilian coast and investors piled into the company which boasted oil reserves valued at $1 trillion by the man himself.

Batista was born into mining as son of a CEO of iron giant Vale and the young Eike led the playboy lifestyle, dropping out of engineering school, marrying a nude model and becoming a speedboat world champion.

Ever the consummate salesman, Batista famously sold Minas Rio to Anglo-American in 2008, pocketing $5.5 billion and getting rid of what has become Anglo’s biggest asset write-off on record.

Batista’s divestiture strategy to shore up the vast debts he had built up had more than a whiff of a fire sale this year as his firms began to run out of capex funds and creditors started making collateral calls.

AAA

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Judge rejects trustee

preferred by Ginia Rinehart

RINEHART WOMEN IMAGE www.www-globalcommodities.com

The NSW Supreme Court has rejected a proposed replacement trustee put forward by Gina Rinehart’s daughter Ginia Rinehart on the basis that it was too late to allow her siblings to investigate her proposal.

The decision was made by Judge Paul Brereton on Friday morning, less than 24 hours after he refused to let Bianca Rinehart to nominate as replacement trustee of the $5 billion family trust due to the delay.

Friday’s judgment means the only remaining possible replacements are Bruce Carter, put forward by the plaintiffs, or John Hancock if he chooses to stand. Christopher Withers, John and Bianca’s barrister, said he needed to take instructions on that.

Ginia Rinehart has suggested an independent trustee be appointed under a more complex structure. The judge said it would be “highly desirable” to allow both Bianca and Ginia’s suggestion to stand if the parties would agree to that, but that otherwise he rejected both.

“We seem to be getting rid of them all very, very quickly, and we will end up with a default solution effectively,” Justice Brereton said.

The rejection of Bianca on Thursday was at the request of Ginia, who has sided with her mother in the dispute over the trust, set up for the­ ­children by their grandfather Lang ­Hancock.

Bianca has stood alongside her brother John for the last two years, fighting their mother over her management of the family trust and accusing her of deceiving them.

It was not until Tuesday morning that a last-minute tactical decision was made to nominate Bianca as replacement trustee – a move supported by John, who withdrew his nomination for the coveted position.

Bianca’s decision was vigorously fought by Ginia, who argued that she would need time to investigate and gather evidence on whether her sister would be suitable, and that could not be done in the space of a few days.

Justice Brereton agreed and said that to allow Bianca to stand would create an “unacceptable injustice” to Ginia.

AAA
Henry Sapiecha
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CBA FINANCIAL PLANNERS WOES BUT THEY PARTIED HARD IN NZ NEVERTHELESS

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Amid the fracas of the global financial crisis, 100 of Commonwealth Bank’s top financial planners flew to Auckland for an annual three-day bash in honour of the bank’s biggest earners, the so-called ”diamond alliance”. Donning big hair and jewellery, they bopped and drank the night away at a 1980s solid-gold-inspired fancy dress party.

It was Tuesday, October 28, 2008, and financial markets were looking ragged. Lehman Brothers had collapsed the month before and tensions were high as the elite of CBA’s financial planners gathered to pick up awards and trophies for a job well done at Auckland’s five-star Sky City Grand Hotel.

Yet, charging their champagne glasses as awards were handed out to the top 12 planners, including Don Nguyen, a pall hung over the evening as they tried to forget CBA’s bombshell news the previous day that it had frozen seven CBA-owned Colonial First State mortgage funds valued at $3.3 billion.

Spearmint RhinoSpearmint Rhino Photo: Joe Armao

After spending the day sailing around the harbour in Americas Cup boats while their mobile phones ran hot from panicked investors trying to get answers, Nguyen and his fellow planners tried to focus on the night’s events.

One victim, Jan Braund, a retiree, received a call from Nguyen earlier in the day advising her to ”switch all monies out of existing instruments into the bank’s wholesale cash fund”.

Nguyen rang other clients including an 85-year-old man who had put most of his savings in the fund. It was for a medical emergency. His wife was housebound but was described in the financial needs analysis document as in ”good health”.

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Nguyen’s advice to them was to put in a redemption request straight away. The advice was too late. The funds had been frozen. And with this, his chance to churn them into several new portfolios with new upfront fees for the bank and trailing commissions for planners like himself was gone.

Advisers were given lists of clients on the day who had been affected and told to hose down their fears. Nguyen hit the phone hard.

The freezing of the funds was a disaster for many of the 61,000 investors. More than four years later, some are still waiting to get their final capital allocation back.

<i>Illustration: Simon Bosch</i>
Illustration: Simon Bosch

CBA said some investors received earlier payments as a result of hardship applications.

In the months before October 2008, numerous bank customers had been persuaded to switch from the safety of term deposits to these funds with higher rates, which gave the financial planner and the bank a nice trailing commission that they didn’t get from a humble term deposit sold by a teller over the counter at some suburban branch across Australia.

It was part of a last ditch effort by planners to reach their sales targets and boost their funds under management so that they could earn their June 30, 2008, bonus – and qualify for the international three-day conference.

This week, as more details have emerged of the conduct of CBA’s planning division between 2005 and 2010 and the corporate regulator’s tardy investigation, there is now a Senate inquiry into the regulator and, ominously, ”other matters”.

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There are serious questions on how the Australian Securities and Investments Commission handled the tip-off from a group of bank insiders in October 2008 into allegedly corrupt conduct. The whistleblowers urged that there was some urgency in securing the files of Nguyen as they were being ”cleaned up” and that the issue had much broader implications than one dodgy planner. ASIC finally investigated in March 2010.

CBA has since compensated 1127 clients of Nguyen and other planners who gave ”inappropriate advice”, paying out $49.4 million.

Nguyen controlled up to $300 million of client money and the bank has paid out 200 of his clients a total of $23 million. All up ASIC has banned seven CBA planners, who are believed to have represented thousands of clients and managed hundreds of millions of dollars of their money.

CBA has also undertaken to overhaul its systems, including improving compliance standards.

A spokeswoman for CBA said the bank had worked hard over the past three years improving the business. ”Today, our financial planning business is built on a rigorous compliance and risk-management framework which includes prompt investigation of issues, the most comprehensive staff training program in the industry, changes in remuneration, more rigorous systems and processes, better document management and enforcement of higher standards by new management.”

Several of the managers involved have moved on, and now hold senior jobs at other institutions with similar sales-based type cultures. Some have threatened legal action.

The pending Senate inquiry is believed to have put the other banks into damage control as they look at the activities of their own financial planning arms before the financial crisis. CBA said: ”It is unfortunate that a sales-based culture was not uncommon across the industry at that time.”

It has prompted some class-action law firms to investigate whether the CBA scandal is the tip of an industry-wide iceberg.

Senator John Williams said if the Coalition took government in September the inquiry would complement the financial services inquiry, nicknamed the son of Wallis inquiry after the Wallis banking inquiry of the late 1990s. ”We are looking at the regulation of ASIC and how it performs its duties and this will complement Joe Hockey’s inquiry,” he said.

Meanwhile, the industry is readying itself for a new regulatory regime on July 1, under the Future of Financial Advice, which is designed to clean up the industry and make fees more transparent. CBA believes FOFA will ”ensure that advice customers receive from financial advisers is in their best interests”.

But not everyone is confident that it will result in dramatic change. Whistleblower Jeff Morris, who worked as a financial planner at CBA before leaving in February this year, believes FOFA is a step in the right direction but it doesn’t go far enough. ”The elephant in the room is vertical integration. FOFA does nothing to address this. By encouraging consolidation in the industry it has probably added to the problem.”

Justin Brand, from non-aligned financial advisory Arc Financial Consulting, says the vertically integrated model is inherently conflicted. ”What you have is product manufacturers controlling advice channels, setting product targets and ultimately creating a group product ‘sales is everything’ culture, as recently exposed,” he said.

It was the ”sales at all costs” culture insiders and former staff close to the situation believe was the cause of the problem at CBA. They warn that FOFA will deal with hidden fees and disclosure but it won’t change the quest to drive sales.

Geoff Derrick, national assistant secretary at the Finance Sector Union, said FOFA was a step forward but continuing dependence on commission-based remuneration and sales targets meant banking culture remains ”a numbers game”.

”The problem is that some people in the industry have lost their moral compass. What we are particularly worried about is the conflict between what is in the best interests of the banks’ bottom lines and what is in the best interests of customers.”

A Fairfax Media investigation can reveal that the culture inside the planning division before the financial crisis was like a boiler room – such as was made famous in Ben Affleck’s movie, Boiler Room – a place that thrives on high-pressure sales tactics and strategy to sell financial products.

Since the Fairfax Media investigation began, dozens of former and current CBA staff have come forward to provide detailed information on what happened at the bank at that time and give an insight into the way the bank interacted with the corporate regulator. Insiders have detailed how planners were indoctrinated to focus on sales and fees at any cost. ”This was not financial planning, this was head-counting commission car selling,” one former CBA planner said.

Several former CBA staff said the excesses of the boiler-room culture were best demonstrated in April 2008 when sales were dropping through the floor and managers started to panic that their annual bonuses were shot. Two key managers, who have since moved to other financial outfits, decided that the solution was to tap into CBA’s huge deposit book (the largest in the country) and switch it into mortgage funds, which would hit the funds under management figures before June 30 and, bingo, problem solved.

Over the course of April and May 2008 they held meetings in state offices, handing out local branch deposit data that detailed client names and bank accounts with amounts over $50,000. ”They blatantly asked planners to contact as many of these clients and ‘churn’ the 100 per cent secure funds into the Colonial First State Income Fund. This was so everyone – including the managers – would hit their full-year targets and qualify for a hefty bonus … it was big money at stake,” a senior planner said.

When some got their bonuses, planners and managers celebrated at Otto’s in Sydney’s harbourside Woolloomooloo before finishing up in a seedy strip joint in Kings Cross. When the same managers visited the Melbourne planners, the night ended at Spearmint Rhino, a strip joint in Melbourne’s King Street.

Many former planners recall being actively hounded to generate excess sales and threatened with dismissal if they didn’t meet targets. For the planners who wrote the most business, the world was their oyster.

Insiders say the relentless focus on sales and commissions meant financial planners – and senior management – were often at loggerheads with the bank’s compliance staff, who were there to make sure standards were met.

Compliance was described as the ”business prevention unit”. ”The problem was that senior management had their KPIs [key performance indicators] listed as moving money to CFS [Colonial First State]. It was identified even in compliance meetings as a key indicator of success. Those KPIs were filtered down to middle management and then the advisers. What has that got to do with providing quality of advice?” one former compliance manager said.

External compliance controls had been removed in 2004, to be replaced with an internal unit that was tasked with ensuring that 700 CBA planners provided appropriate advice to clients, kept and maintained records and met regulatory guidelines.

When file reviews led to poor performance ratings, planners risked losing a large chunk of their bonuses, as well as threatening those of their superiors.

Documents reveal that sales targets of funds under management and fees were increased every year to the detriment of client interests.

An email sent in 2007 by a manager who still works today in a similar role at CBA outlines targets for planners. This included 12 referrals, eight first interviews a week, five statements of advice (SOA) a week, with the proviso that planners ”only to produce SOAs where a sale will result”, four sales a week and one ongoing service client per month, which is equivalent to 12 a year.

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A former planner said: ”Planners were expected to focus on bringing in new business, more funds under management, more upfront revenue, rather than providing service to existing clients. If they didn’t, they would be sacked.”

There were constant threats of being placed on ”performance management”. ”Not many came out the other end of that 13-week process of ritual humiliation,” a former planner says. ”So the constant pressure for sales, from a management hierarchy whose bonuses depended on it, placed the so-called financial planners in an invidious position: do the right thing and lose your job; or get on board the management bandwagon and stitch up the widows and orphans as required.”

A spreadsheet of actual sales against sales targets for the period February 2006 shows that out of 43 groups only four areas were below the income target of 100 per cent, with the majority 150 per cent and above.

The whistleblowers who reported Nguyen to ASIC on October 30 described the culture as ”nothing more than a sales channel”. They said: ”In the current difficult climate planners are now being threatened with the sack if they don’t meet their sales targets … The message is clear, ‘do what you have to do – or else’. This management culture explains why people like Don Nguyen are tolerated, even valued and protected. The client’s interests don’t really get a look in. This is an issue with much broader implications than one dodgy planner.”

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One former senior planner said each Monday would start with a sales meeting in the bank branch. ”There would be a video clip from CBA TV featuring some luminary babbling on about some aspect of the ‘sales and service’ culture. The ‘service’ part meant that we would ‘assist customers to meet their needs and objectives’; which really meant sell them as many CBA products as possible.”

The statements of advice to clients looked impressive to the uninitiated but most of the pages were standard ”boilerplate” text, a former planner said. ”Again, you only needed one signature at the end and unscrupulous planners would gloss over or just lie about the fees. Come audit time and they’d give you two weeks’ notice to get the specified files into shape. I believe that this is when a lot of the harassed planners, lacking client signatures, would resort to forging them,” he said.

One planner recalls being present at an event where it was announced by a jubilant manager that Nguyen had persuaded a widow to pay him a fee on a $1 million investment. He was referring to Nathalie Kulakowski, an 88-year-old, who signed a document, which Nguyen later filled in saying ”generation of more income was not important to her”. It also said her timeline for investments was seven years with access to funds after five years, when she was 93. She maintained that Nguyen did not tell her $30,421 of her investment would be paid to CFP, including $16,732 in commission to Nguyen.

Nguyen’s treatment of the client would eventually be cited as a cornerstone case when he was banned by ASIC for seven years in 2011.

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In a 10-month period in 2007, Nguyen brought in $39 million in

new business, more than 3½ times his sales target. Despite repeated warnings from 2006 about the quality of Nguyen’s work, including the rorting of fees, cash backhanders and warnings by compliance that he was a ”serious business risk”, Nguyen was promoted to senior planner in October 2008.

But even as CBA began to face lawsuits from victims over his misleading and deceptive financial advice, Nguyen continued to work with a minimum of compliance oversight. In fact, senior staff debated ways to ”position” past negative reports about his conduct in a response to inquiries by ASIC.

As late as March 2009, the bank’s decision to assess Nguyen using centralised file reviews saw him receive a ”negligible risk” rating. Within four months, he would quit the bank.

But just how routinely oversight and compliance rules had been violated became stunningly apparent when internal investigations into Nguyen began in earnest in the lead-up to his ”resignation” in July 2009.

An inspection conducted on May 29, 2009, found 17 client files were missing, one of which had already been declared ”lost” by Nguyen after a spot check the previous year, according to internal bank documents.

While CBA would eventually wash its hands of Nguyen, it didn’t happen quickly enough – and Nguyen wasn’t alone.

Queensland-based planner Ricky Gillespie would be banned from the industry for life in late 2012 after being caught forging client signatures.

Documents obtained by Fairfax Media reveal that the bank knew of at least 14 instances of forgery as early as October 2008 – around the time of the annual conference – but it would take until June 2009 before Gillespie ”resigned”.

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A CBA compliance report on Gillespie dated October 16, 2008, advised of ”issues of suspected irregularities” in the signatures of four of his clients. Within a month another 10 signatures had been identified as possibly fraudulent. In one case, the forged signature was used to obtain a one-off commission of $3200 and create a continuing fee of 0.83 per cent of the value of an investment portfolio.

One document, dated November 20, 2008, says: ”Rick Gillespie, financial planner, PBS Queensland has forged signatures of 14 clients. The initial allegation has a fraud element as it appears the adviser forged the signature of his client on a FSG [financial services guide] receipt and a TWA [transaction without advice] to obtain a one-off fee of $3200 plus ongoing fee of 0.83 per cent.”

The conduct of Nguyen, Gillespie and others destroyed the retirement plans of thousands of hard-working Australians, some whom were forced to rely on Centrelink when their nest eggs were depleted by bad investments they never agreed to.

They include Mervyn and Robyn Blanch, who saw their life savings plunge from $260,000 to $92,000. A retired reverend also suffered after investing $147,163 in 2006 with Nguyen and seeing it drop to $65,772 by February 2009.

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Initially the bank refused to compensate him but in late 2010 he was offered $37,000 without admission of liability. He was offered a further $14,000 in February 2013.

Another victim was an 87-year-old man, hard of hearing and partially blind. His son, who is fighting to get compensation, said his father had saved his whole life with Commonwealth Bank and only ever put his money into term deposits. ”One day he had a visit to his house from a planner who put him into different products. Dad was in his last days and passed away three years later. Why on earth would he put his money into riskier investments?” he said. ”He lost a lot of his money and we [my brothers and sisters] supported him until his death as his money got locked into the deals during the GFC,” he said.

An incensed bank client, Leo Southwell, who invested in the Colonial First State Mortgage Income Fund, said while investors received no income, planners continued to receive trailing commissions of 0.44 per cent. ”There is an old saying that there are two types in this world, wolves and sheep. Well, we’ve been fleeced and now they are coming for some mutton.”

CBA wasn’t the only financial institution offering these funds, with about $24 billion of funds locked up during the GFC

The Senate inquiry will be wide ranging, covering the effectiveness of ASIC and, according to Senator Doug Cameron, will include CBA and its financial planning arm. The inquiry is seeking information from the public.

For the many victims who had to wait years to get compensation, they are pleased to be able to have a voice. Merilyn Swan, the daughter of the Blanchs, who were forced onto Centrelink because of ”inappropriate advice”, welcomes the inquiry. ”Nguyen is the primary cancer, from which the malignancy spread. They all need to be held accountable, including Nguyen, and be made responsible for the misery they inflicted on their investors and face some serious repercussions for their activities. There needs to be some sort of justice extracted from this sorry episode,” she said.

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Henry Sapiecha
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THE LATEST ON THE ANONYMOUS CURRRENCY BITCOIN

Money is a delusion – but a delusion that works as long as it’s shared. The value of a U.S. dollar was once tied to a government guarantee that you could, at any time, exchange it for a quantity of precious metal – but since America officially abandoned the gold standard in 1971, its value is now more or less rooted in its ubiquity. If large swathes of people decided they would no longer accept it, it would suddenly be worth a lot less.

Government currencies like the American dollar are also a bit odd, in that a government can decide to print more money at any time to serve its own purposes. This is very handy for the government, but through inflation it causes each individual dollar to be worth a bit less each time.

It’s a problem that will persist with pretty much any currency that’s managed by one central organization. And distrust of these organizations is one of the strongest driving forces behind alternative currencies like Bitcoin. The idea is to create an entirely new currency that’s widely accepted, fairly stable, and more or less inflation-proof because the money supply can’t be increased at the whim of some central figure.

So how do you create a new currency?

The answer, more or less, seems to be that you simply build it, convince people it’s worth something, and give them an incentive to get on board.

Bitcoin was first proposed in 2008 – a fortunate time, since faith in the global banking hegemony and government control of money was crashing as the global financial crisis kicked in.

It was designed by “Satoshi Nakamoto” – a pseudonym, possibly for a group of anonymous designers who have never revealed themselves. Bitcoin’s key selling points from day one were solid, trustworthy and transparent technology, a controlled money supply and a built-in early adopter bonus that made them very cheap to produce while the currency got off the ground.

The third point is probably the most important; Bitcoins are produced by getting a computer to crunch complex algorithms. Once a certain amount of work is done, you create a brand new bitcoin. That amount of work was very quick and easy early in the piece, so early adopters were able to churn out large numbers of coins. But the algorithms are designed to become progressively more difficult over time, until a point some time around 2040 when the supply will be capped forever at around 21 million bitcoins.

Effectively, if you got in early, you could use your personal computer to churn out thousands of bitcoins – giving early adopters a heavy incentive to find things to do with them. But now, the Bitcoin mining process is already so difficult that you need a specialized rig bristling with dozens of graphics cards to make any decent progress.

This gradual restriction of supply is what Bitcoin advocates maintain makes the currency inflation-proof. There’s no such thing as “quantitative easing” in the Bitcoin world. In fact, as the money supply crawls to a stop, the currency should deflate over time, making each bitcoin increase in value.

Of course, it also makes the Bitcoin system look a lot like a pump and dump scam as well – early adopters mined huge amounts of bitcoins early on for very little effort, and stood to gain huge amounts of cold, hard, non-virtual cash if they could convince other people the bitcoin was worth something. But let’s backtrack a little before we explore that.

How bitcoins work

The most important feature of a digital unit of currency is that ownership can be authenticated, and the money can’t be spent twice. You can ensure this by keeping a central ledger somewhere of who owns exactly which bitcoins – but the genius of the Bitcoin system is that this ledger is completely decentralized and run as a peer-to-peer system like the BitTorrent network.

When you make a transaction, the Bitcoin network sends out a notice and a confirmation process takes place. In this confirmation process, the transaction history of the particular bitcoin being moved is checked against the records of a number of different nodes in the system. Only when several nodes “agree” that the bitcoin is authentic does the actual transfer occur.

A bitcoin itself is just a string of letters and numbers – the system would be vulnerable to all sorts of hacks if it wasn’t for this peer-to-peer tracking system. And although the bitcoin’s entire transaction history is sent around the network for checking, it’s only a series of bitcoin wallet addresses that are used, rather than account names – making it virtually impossible to work out exactly who owned the coin in the real world.

This also makes it virtually impossible to prove you owned a bitcoin if you misplace its alphanumeric code. If you delete your wallet file or forget your passwords, your money is gone forever.

Getting money in and out of the Bitcoin system

First off, you need a wallet. You can either download the original Bitcoin client and run it on your own computer, or you can trust a third party online service like MyWallet to take care of it for you.

From there, there’s a number of ways to buy bitcoins with regular cash. You can strike a deal directly with another bitcoin owner over at Bitcoin OTC, use a big-time currency exchange like Mt.Gox or any number of others.

If you want to keep your identity as far away from the transaction as possible, you can use a cash deposit service like bitinstant – you notify the service that you want to buy X dollars worth of bitcoins, they give you some deposit details, and you simply walk into a bank (or another deposit location like a 7-11 or Walmart store) and drop off the cash with a given account and reference number. Once the transaction is verified, the bitcoins are transferred to your ownership. The process takes less than an hour and costs you a four percent fee.

To get money out of the system, you’ve got to effectively sell your bitcoins. The easiest method is probably to register with a big exchange, sell your coins and have them transfer the money to your local bank account.

There’s other services that will pay you back through Paypal, vouchers and all sorts of other options – and if you want to keep things totally anonymous, you can always strike a deal directly with somebody who wants to buy the bitcoins, and dodge the transaction fee in the process.

What’s a bitcoin worth?

Graph showing the value of 1 Bitcoin from 2009-2013. Created at bitcoincharts.com.

As I write this, close to US$30. Here’s a live update. The currency is still pretty volatile, its value changes constantly. If you’d bought yourself a bitcoin in December last year, you’d have doubled your money in the last 50 days.

That’s nothing compared to the gains the early adopters have made, though – bitcoins were worth literally nothing back when the system went online in January 2009. They were trading for less than US$0.10 back in September 2010, and only broke the US$1 mark in February 2011. They spiked up to US$27 in May 2011, then crashed down to US$3.50 within a couple of months when Mt.Gox and MyBitcoin were hacked, resulting in a leaking of user information and some straight-up bitcoin theft.

Right now, it’s riding higher than it ever has and spiking upwards like crazy, and there’s every chance you can still make money as a speculator – as well as every chance that it’ll crash again before 2014.

What can you buy with bitcoins?

Lots of things. Bitmit is like a sort of Bitcoin eBay, although its most popular items are cash buybacks, electronics components, video games and the odd porn site membership.

There’s a heap of traders that accept Bitcoin payment listed on the Bitcoin wiki, selling everything from photographic services, to pizzas, to coffee beans and hotel stays.

Of course, most people don’t get into anonymous crypto-currencies to buy coffee beans. The anonymous nature of the service also opens the door to the online black market, and this is where Bitcoin seems to have made its biggest mark.

Through deep-net, highly encrypted and anonymous sites like Silk Road, you can have an astonishing array of illegal drugs sent straight to your doorstep through the post in virtually undetectable fashion. Silk Road deserves its own article – it’s fascinating.

Through other sites, you can order pretty much anything from weapons to the services of a hitman. It’s all anonymous, so trust is paramount and there’s a lot of scammers out there trying to take you for a ride, as well as plenty of ways to expose yourself to the risk of being caught.

And of course, you can use bitcoins to send money to organizations like Wikileaks or The Pirate Bay, even if payments are blocked by organizations like PayPal or Visa.

Pros and cons of bitcoins

Pros:

  • They’re more or less anonymous if you take the right precautions, meaning your transactions can’t be tracked or taxed
  • They will never devalue due to inflation – in fact, a slow process of deflation is built into the algorithm
  • There is often no transaction fee when moving bitcoins
  • You can buy things with them
  • You can trust the authenticity of your bitcoins, and prove your ownership of them
  • You can speculate on bitcoin values by buying and selling them as the market fluctuates

Cons:

  • Like U.S. dollars, they have no inherent value. If other people don’t want them, they’re worthless
  • Bitcoins will never be any good for over-the-counter or face to face payments, because every time you make a transaction, there’s a roughly 10 minute wait as the network validates the bitcoins’ ownership. This wait will get longer in the future, too.
  • Like cash, if you lose your Bitcoin wallet, you lose your money
  • Currently, the most popular uses for bitcoins seem to be speculation, scams, money laundering and black market contraband sales. This is not escaping the attention of the authorities. However, it remains to be seen if they can actually do anything to stop it
  • They can be stolen

A couple of final thoughts about Bitcoin

There is definitely money to be made in this system for smart operators. Of all the attempts at creating an anonymous digital currency, Bitcoin is far and away the most successful to date.

But there’s still a few reasons, beyond just the bitcoin’s volatile value, to pause before you jump in with a substantial amount of your own money.

Firstly, while there are more than 1.8 million registered Bitcoin users, a large amount of the money seems to be concentrated to a few users. We know this, because while it’s totally anonymous, you can get a hold of the entire transaction history for the network. In October 2012, this report was released showing that the vast majority of Bitcoin accounts hold very small amounts of money, more than 75 percent of all bitcoins are being hoarded instead of being spent, one anonymous figure holds around 25 percent of all the bitcoins in circulation, 90 percent of Bitcoin traffic seems to be speculative trading and not goods and services purchases, and it seems as if other large holders are trying to shift their bitcoins around a lot to conceal exactly how much they own.

So while Bitcoin advocates point to the fact that the currency is definitely being used for goods and services to prove that it’s not some sort of giant Ponzi scheme, it’s also irrefutably true that the vast majority of existing bitcoins aren’t being used at all. And while the idea of the whole system is to create a currency that’s not at the mercy of some central administration, you could easily argue that a few key figures hold a huge amount of power over the bitcoin’s value.

Secondly, if one person or group were to control enough “nodes” of the Bitcoin checking system, it’s theoretically possible for that group to change the rules and start fraudulently awarding itself money. You’d need to control a lot of the network to make it happen … But then, according to some sources Deepbit‘s mining collective already clears more than a third of all Bitcoin transactions.

And thirdly, there is an awful lot of genuinely dodgy stuff going on in this system. From hacking and theft, through scams and money laundering, to illegal contraband sales, there’s a reasonable chance that any bitcoin you buy is directly or indirectly helping bad guys do business. But then, it’s up to you whether that’s better or worse than giving your cash to a national government, isn’t it?

CLICK HERE FOR AN EARLER BITCOIN STORY WE PUBLISHED >

Sourced & published by Henry Sapiecha

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