Bernard L. Madoff: What a Lack of Ethics Can Do Name: Reginald … · $65 billion over 20 years,...

Bernard L. Madoff: What a Lack of Ethics Can Do, By Reginald Hawkins, OGL 260, Unit 1 Paper, 05/19/2015

Bernard L. Madoff: What a Lack of Ethics Can Do

Name: Reginald Hawkins

University: Arizona State University

Course: OGL 260

Date: May 19, 2015


Throughout the years, the financial sector has seen numerous unethical moments. From

the Enron accounting blunder to the Lehman Brothers collapse, the business world has seen

almost everything. Yet, despite the unethical events mentioned earlier, not one of them stands

out like the Madoff investment scandal. But what makes this event so horrifying and known as

the worst in history of its kind? This paper will examine this question, define one of the financial

sectors biggest scandals, and provide the reader with an example of what a lack of ethical

behavior can cause.

On paper, Bernard (Bernie) Lawrence Madoff had a fairly normal upbringing. He was

born on April 29, 1938 in Queens, New York. His mother, Sylvia Madoff, was a stay at home

wife; while his father, Ralph Madoff, was a plumber and stockbroker. Mr. Madoff is one of three

children, with a brother and sister. He earned his high school diploma from Far Rockaway High

School in 1956, graduated from Hofstra University with a bachelor degree in political science,

and attended Brooklyn Law School briefly, before leaving to create his first and only investment

securities firm. During that busy timeline, he made room to marry his high school sweetheart,

Ruth Madoff, and had two children. Upon examination, you can safely say his childhood and

early adult life are not the cause of what he would become.

Bernie Madoffs early career was just as spotless as his early personal life. Most college

graduates, just out of college, take an internship; not Mr. Madoff. He finished his higher

education in 1960, and the same year, with $5,000 that he saved from working two jobs, he went

on to found the Bernard L. Madoff Investment Securities company. His startup specialized in

trading stocks of smaller companies’ not listed on an organized market, which was a legitimate

form of business. Yet, the company also had an investment management division, that would


eventually lead to Mr. Madoff’s and the firms’ downfall. Why would a firm fund an illegitimate

department if profits are being generated legitimately; pure greed.

The greater the risk, the greater the reward. That saying also applies to scandals, but it

has a flip side. The reward will only last short-term, because eventually the corruption will be

discovered. So what risk did Mr. Madoff’s firm take? The Bernard Madoff Investment Securities

firm guaranteed returns to clients that were impossible to obtain. Yet, some investors were

earning gains despite how the market performed. In actuality, the company was paying existing

clients with the money acquired from new investors, while skimming fees from fabricated

transactions. In fact, it was later determined that the last actual trade done by Bernie Madoff was

back in 1990, and all return data since then was fraudulent. This is considered a classic Ponzi

scheme; a form of fraud in which belief in the success of a nonexistent enterprise is fostered by

the payment of quick returns to the first investors from money invested by later investors.

(Oxfords Online Dictionary, n.d.) Bernie Madoff had defrauded investors out of an estimated

$65 billion over 20 years, and is considered the largest Ponzi scheme in history.

The company and leader sacrificed ethics, for what they believed would be a greater

reward, and it cost both involved everything. Additionally, their lack of ethics also damaged the

financial well-being of others. Naturally, Bernie Madoff found himself in prison, and his entire

family forfeited huge amounts of cash to lawsuits; but what happened to the company he

founded. Bernard Madoff Investment Securities was a Limited Liability Company, so it may

have been possible for it to beyond the owners exit. It had some legitimate businesses, and even

a philanthropic division that donate large amounts of money to charity. Why couldn’t the

company continue? It lacked ethics, and all businesses must be based on some truth. This scandal

is a great example of how a business that lacks ethics cannot exist, long-term.


References

Definition of Ponzi scheme in English:. (n.d.). Retrieved May 17, 2015, from

http://www.oxforddictionaries.com/us/definition/american_english/Ponzi-scheme

Bernard Madoff. (n.d.). Retrieved May 17, 2015, from

http://en.wikipedia.org/wiki/Bernard_Madoff

Keown, A., & Martin, J. (2014). Foundations of finance: The logic and practice of financial

management (8th ed.). Boston, MA: Pearson.

Madoff investment scandal. (n.d.). Retrieved May 17, 2015, from

http://en.wikipedia.org/wiki/Madoff_investment_scandal

Fannie Mae: The Secondary Markets First Star, By Reginald Hawkins, OGL 260, Unit 2 Paper, 05/26/2015

Fannie Mae: The Secondary Markets First Star



Course: OGL 260

Date: May 26, 2015


Between 1933 and 1938, the United States Congress enacted a series of domestic

programs to begin the recovery process from the Great Depression. These programs were put

into effect to foster the relief, recovery, and reform of the economy. Part of this focus was aimed

at housing, and the expansion of the secondary mortgage market. This initiative called for the

creation of the Federal National Mortgage Association (aka Fannie Mae). This paper will

examine the company, define its history, and analyze what it’s become today.

Fannie Mae was created in 1938 by Franklin D. Roosevelt (FDR). The corporate

headquarters is located in Washington, DC, while regional offices are based in Atlanta, Chicago,

Dallas, Pasadena, and Philadelphia. Fannie Mae is categorize as a Government Sponsored

Enterprise (GSE), which entitles the firm to the financial support of the Federal Government, in

the form of tax exemptions, access to lines of credit from the United States Treasury, and

Securities Exchange Commission exclusions. In 1954, the Federal National Mortgage

Association Charter Act amendment passed, and Fannie Mae became classified as a mixed-

ownership entity. This structure change allowed private investors to hold common stock in the

company, while preferred stock would remain with the Federal Government. Fannie Mae’s

division of ownership would remain in effect until 1968, the year the company became a private

entity, and spun off its government sponsored half into the company now known as the

Government National Mortgage Association (aka Ginnie Mae). This is the business structure that

would remain intact into the present. In 1970, Fannie Mae began purchasing conventional

mortgages, and in 1981, the company released its first mortgage-backed security.

The Federal National Mortgage Association has one main objective, to provide its clients

(lenders) with options that assist their lending needs, and support the development of the United

States secondary mortgage market. The firm accomplishes this goal through the securitization


(pooling of debt) of mortgages from lenders. Fannie Mae then compiles the assets, and sells them

to investors as mortgage-backed securities (MBS). This process allows loan originators and

banks to free up funds for reinvesting in other opportunities, thus making it possible for financial

institutions to offer more housing loans.

Fannie Mae’s process is exceptional, but just like any company, they too had some rough

patches. The first challenge arrived after thirty years of operations. During that time, the

company was the only firm that purchased mortgages from lenders, and had been classified as a

monopoly. As a fix, Congress created its biggest competitor, the Federal Home Loan Mortgage

Corporation (aka Freddie Mac), and they’ve remained in competition since. In the 1990s, Fannie

Mae came under scrutiny again. This time the heat came from the presidential administration for

not meeting affordable housing goals. The company made adjustments, and continued to chug

along with success. Next, the company faced the subprime mortgage crises of 2003-04. More

lenders were utilizing the services of privately owned mortgage-backs securities, removing a lot

of control the Government Sponsored Enterprises held over originators. This shift led to an

unusual amount of borrowers with less than adequate credit, tied to mortgages they were unable

to payback, causing some to worry if Fannie Mae might have to file for bankruptcy. This

ultimately led to a stock value decline and delisting from the New York Stock Exchange, in

addition to a government bailout being issued to the company that would potentially cost

taxpayers billions, to revitalize the firm. The events mentioned earlier are just a few of the tough

situations Fannie Mae’s encountered since inception; the company’s also faced allegations over

accounting practices, potential kickbacks, conflicts of interest, and the list continues.

Despite all the hiccups and challenges the company’s faced, Fannie Mae is still one of the

darlings of the secondary mortgage market. In 2014 the company amassed $25.8 billion in


revenue, with $14.2 billion of that number resulting in net income for the business. The same

year, the firm provided close to $434 billion dollars in liquidity to the secondary mortgage

market, and helped approximately 165,000 families avoid foreclosure by working out solutions

for each one. In fact, the company is still selling stock over-the-counter (all security markets

except organized exchanges (Keown 2014, Pg. 25)), and has seen its value go from $0.28 per

share, to as high as $5.33 per share over the last five years. Fannie Mae has had its struggles, and

the company is not completely back to healthy just yet. But the company is on the right path, and

will remain a necessity to the sector for many years to come.


References

Fannie Mae. (n.d.). Retrieved May 26, 2015, from http://en.wikipedia.org/wiki/Fannie_Mae


management (8th ed.). Boston, MA: Pearson.

Fannie Mae. (n.d.). Retrieved May 26, 2015, from http://fanniemae.com/portal/index.html

Running Head: Barnes & Noble: Where are they Headed? 1

Barnes & Noble: Where are they Headed?



Course: OGL 260

Date: June 1, 2015

Barnes & Noble: Where are they Headed? 2

Barnes & Noble was founded in 1873, and has been around for 142 years. They’ve sold

books, magazines, and even video games (GameStop was one of the company’s spin-offs) with

great success. Yet, after analyzing their 2014 annual report, you quickly see that despite their

deep history and experience, the company is faced with so many challenges, you would think

they’re a start-up. This paper will exam the company’s 2014 financials, and create a hypothesis

based on that data of the state of the firm currently, in addition to, where they are headed.

The sales of the business are broken down into three components: Retail, College, and

NOOK (e-books, e-readers, etc.). The ‘Retail’ section of the company is its foundation main

source of revenue. This component consists of the money brought in from sales at its brick and

mortar stores, which is how the company began. In 2014, the company amassed approximately

$4.3 billion in sales from its ‘Retail’ category, which is 67% of their total sales revenue for that

year. That’s a very good number, but still a decline from the previous year’s total in that division.

In fact, total sales in the ‘Retail’ category have seen a decline each year, for the past five years.

This decline can most likely be attributed to consumers increase in internet use, e-book

purchases, and Amazon. To compensate for the deterioration in ‘Retail’ sales, the company has

applied greater resources toward its ‘College’ & ‘Nook’ components. These two divisions have

seen un-stable numbers over the past five years, but show the most promise in this changing

market. In 2014, the ‘College’ division incurred a small decrease in total sales compared its

previous year’s results, and finished at close to $1.75 billion. This component includes textbook

rentals and co-branded online university stores, which despite the decrease, is a very lucrative

category going forward. In fact, CEO Leonardo Riggio had this to say about the division,

“College opened 30 new stores, and we see a strong pipeline ahead. The number of new and used

titles available for rent increased significantly, driving textbook rental growth of 61% for the


year. Rentals provide a significant cost savings to students and higher textbook margins for the

company. We see significant opportunities at College going forward.” (Barnes & Noble 2014

Annual Report, 2015) The ‘Nook’ component incurred a large decrease as well, finishing with

around $505 million in sales, which is a decrease of close to $275 million from the previous

year. E-books are very popular right now, so the company cannot attribute this decrease to a lack

of consumer appeal. After looking at that change, an analyst would have to say it’s from strategy

missteps, and a competitive marketplace that the company does not understand. With each sales

category on a decline from the previous year, total sales as a whole for the company saw a

decrease from 2013 to 2014.

Most of this paper is dedicated to the decrease in sales from the previous year, because

that is the problem area for the company. You would think because of that decline, the company

would have had a net profit loss greater than the previous year, but that’s not the case. Barnes &

Noble compensated for the change by closing 17 brick and mortar stores, while only opening up

three new stores. This reduction of 14 total stores, caused the company to reduce its operating

cost by close to $600 million when compared to the previous year’s total. Include a decrease in

tax expense, interest expense, and depreciation expense, the company finished with a net loss of

close to $50 million. Compared to the previous year’s $157 million loss, I think the company did

everything they could to dodge a bullet.

In my opinion, Barnes & Noble is a company without direction, and shrouded in

uncertainty. They see the future of their market (e-books, e-readers, etc), they tried to get a jump

this changing sector, but there competitors got there first, with superior products, and stronger

guidance. I feel the company’s brick and mortar business will suffer the same fate as Borders

Books, causing them to follow suit and shut down stores. Yet, unlike other book companies that


have closed their doors, Barnes & Noble will truly reinvent itself at some. I believe the upper

management team sees the same thing with their announcement of spinning the Nook division

off into a separate company, and making a deal with Samsung to outsource its e-reader

production. Only time will tell if this is the right strategy.


References

Barnes & Noble. (2015). Barnes & Noble 2014 Annual Report. Retrieved from

http://www.barnesandnobleinc.com/documents/bn_annual_report_2014.pdf


management (8th ed.). Boston, MA: Pearson

Running head: Portfolios, Diversification, and Investment Types 1

Portfolios, Diversification, and Investment Types



Course: OGL 260

Date: June 3, 2015

Portfolios, Diversification, and Investment Types 2

I’ve always been interested by investing and the stock market. Years back, I tried to

invest in securities, but lacked success. Investopedia’s “Investing 101: A Tutorial for Beginner

Investors” was a great re-introduction to the concept, and the valuable tips it contained could

really help me turn my luck around in future attempts. I especially found the topics on

“Portfolios and Diversification” in addition to “Types of Investments” to be the most interesting.

Those two sections were so fascinating, I decided to make them the topics of this paper, and I

will analyze each individually.

The “Portfolios and Diversification” chapter begins by defining a portfolio, from an

investors perspective. In the art world, a portfolio is a compilation of work samples, so it’s a little

different in the securities arena. In the investing domain, a portfolio is a grouping of investments,

designed by an investor, to obtain the creators desired returned. The portfolio does not have to

consist of just one company or type of investment, it can, and usually is a mixture of various

securities. Actually, a portfolio is usually created based on the investor’s attitude towards risk.

The tutorial defines two types of portfolios: “Conservative” and “Moderately Aggressive”. A

conservative portfolio is for the investor that’s looking to minimize risk, yet still achieve a

return. The conservative portfolio consists mostly of fixed income securities (cash, certificates of

deposit, money markets, treasury bills, bonds, etc.), and makes up between 70 to 75% of its

contained investments. This type of portfolio usually hovers around its established value because

of its fixed income securities, with the hopes of yielding a greater return from its smaller portion

of equities. On the other hand, the moderately aggressive portfolio is quite the opposite. It is

designed for the investor that has the ability to take on riskier investments, and is looking for a

greater return long-term. This portfolio is pretty close to balanced, with about 50 to 55% in

equities, while the other 45 to 50% is allocated to cash and fixed income securities. The chapter


also does not stop at just defining the term “portfolio”, it also explains its purpose. Investors use

portfolios for diversifying investments, a necessity in the securities world for success. If an

investor allocates all their funds toward one security, and that security takes a loss, the investor

loses. On the other hand, if an investor diversifies its investments through the use of diversified

portfolios, when one security takes a loss, others that yield a positive return could offset the

investment with the declined value. To sum up the section, Diversification combined with

portfolios equal balance and strategy.

Next, the section titled “Types of Investments” does an incredible job of breaking down

various kinds of securities traded on today’s market. The chapter begins with bond securities,

which are considered fairly safe investments. The bonds concept is simple; an investor purchases

a bond, and receives a set amount when they redeem it at a predetermined later point in time. If

the owner of the bond redeems the security earlier than the preset maturity date allocated to the

bond, the redeemer receives a pro-rated value for the time the bond was held, and forfeits the full

maturity value. Bonds have a low risk value, thus they come with an equally low possible return.

The section, then moves on to stocks, which are securities that grant the investor ownership in

the business tied to the investment. Stocks are riskier than bonds, but also have a greater

potential reward attached. In fact, some stocks might even pay a dividend, but there is still no

guarantee. Next, the chapter looks at mutual funds. These securities consists of a combination of

stocks and bonds. The investor is combining his money with others, and a professional investor

decides which investments will be part of the mutual funds portfolio. With mutual funds the

investor sacrifices control of his or her investments, for diversification and reduced risk. Lastly,

the section describes other investment types, such as gold, real estate, and futures, but it’s very

brief, yet still worth a small glimpse.


In conclusion, I wish I’d encountered this tutorial when I first tried investing with my

eTrade account back in 1999. If I had this education, I would not have had a portfolio blanketed

with internet companies that ended up going under when the dot com bubble burst.

Diversification is the way to go, and I am going to make sure I keep that in mind when I create a

new portfolio. Great tutorial, and very educational.


References

Investing 101: Introduction | Investopedia. (2004, September 9). Retrieved June 2, 2015, from

http://www.investopedia.com/university/beginner/



Running head: Johnson & Johnson: How? 1

Johnson & Johnson: How?



Course: OGL 260

Date: June 11, 2015

Johnson & Johnson: How? 2

Johnson & Johnson, simple name, for a not so simple company. This consumer health

products firm has a deep history, an excellent corporate culture, and steady earnings. One

question needs to be answered, “How did they achieve this success?” This paper will exam

Johnson & Johnson, and will analyze what makes this company so special. So without further

ado, let’s begin with looking at the firms’ history.

Johnson & Johnson was founded in 1886 by three brothers, Robert Wood Johnson, James

Wood Johnson, and Edward Mead Johnson. The company began with just 14 employees, within

an abandoned wallpaper factory in New Brunswick, New Jersey. Johnson & Johnson

incorporated in 1887, as a manufacturer of medical dressings. Within the same century, the

company would go on to create some of the most innovative products imagined.

The company’s business thrived, and decided it was time to branch out into other ideas.

To continue with this initiative, Johnson & Johnson created a bacteriological laboratory to boost

research and development. The company began to create one great idea after the next. In 1888,

the Company publishes "Modern Methods of Antiseptic Wound Treatment," which quickly

becomes one of the standard teaching texts for antiseptic surgery. It helps spread the practice of

sterile surgery in the U.S. and around the world. ("Johnson & Johnson History," n.d.) Within the

same year, Johnson & Johnson created a first aid kit designed for the commercial marketplace. It

was the first kit of its kind for that sector, and almost immediately became the standard for

treating injuries. In 1894, the company created maternity kits for safer childbirths, which would

eventually become Johnson & Johnson’s signature baby powder. The company finished off the

1800’s by becoming the first firm to mass produce sanitary napkins and dental floss, more big

hits for its already booming business. Johnson & Johnson finished the era on a great note, and

moved into the 1900’s with the intent to bring even more innovation to the masses. In 1921, the


company introduced band aids to the world. It was created by an employee, and quickly became

another flagship product for the firm. Johnson & Johnson’s creativity then moved into another

area, shampoo. In 1954, the company released the first shampoo that contained very little soap.

This design would cause less irritation to the eyes, making it a great option for use on young

children and babies. Despite all the previous products mentioned, none come close to the one

they would develop next, and instead of coming from their internal research, it would come from

a company acquisition. Johnson & Johnson acquired McNeil Laboratories, who happen to be the

founders of Tylenol. This pain reliever would be the first of its kind that lacked the aspirin

chemical. Yet again, another flagship product to add to their already growing line, which gained

steam rapidly once after its release. The company would never stop expanding, and continues

making great new products in the present.

Over the last five years, Johnson & Johnson has seen sales increase each year. In fact,

revenue in 2014 topped $74.331 billion for the first time in company history. Johnson & Johnson

went public in 1944, on the New York Stock Exchange. The company trades under the ticker

symbol ‘JNJ’, has seen its stock trade for as low as 0.50 per share, and as high as $108.

Financials for the company couldn’t be better.

Johnson & Johnson continues do great, and they accomplish this by keeping the same

corporate values since inception, while constantly innovating and staying ahead of the

competition. Their success is fueled by the strength of its great products, and today, the

company's business is divided into three major segments, Pharmaceuticals, Medical Devices and

Diagnostics, and Consumer Products. In 2013, these segments contributed 39%, 40%, and 21%

of the company's total revenues. ("Wikipedia: Johnson & Johnson," n.d.) In my opinion, Johnson


& Johnson will continue with the same strategy constantly innovating, and will remain a market

leader in consumer health products for years and years to come.


References

Our Company. (n.d.). Retrieved June 8, 2015, from http://www.jnj.com/about-jnj

Company Overview. (n.d.). Retrieved June 8, 2015, from http://www.investor.jnj.com/company-

overview.cfm

Johnson & Johnson History. (n.d.). Retrieved June 9, 2015, from http://www.jnj.com/about-

jnj/company-history

Johnson & Johnson (JNJ.N) Company Profile | Reuters.com. (n.d.). Retrieved June 8, 2015, from

http://www.reuters.com/finance/stocks/companyProfile?symbol=JNJ.N



Johnson & Johnson. (n.d.). Retrieved June 11, 2015, from

http://en.wikipedia.org/wiki/Johnson_&_Johnson

Running head: Xbox: Risk vs. Reward 1

Xbox: Risk vs. Reward



Course: OGL 260

Date: June 17, 2015

Xbox: Risk vs. Reward 2

In 1997, Microsoft was at the top of its game. The company saved a failing Apple

company with a $150 investment, a massed over $11 billion dollars in sales, and had the number

one operating system on the market. There seem to be no reason for the firm to change its

strategy. Then, four employees pitched the idea of creating a video game console to then

President, Bill Gates. A competitive market, costly, and a sector where Microsoft lacked any

prior experience. Sounds easy for them to skip the idea, but they did not. This paper will examine

what they might have considered before they took the plunge into video games.

First, I believe Microsoft examined the market they were thinking about entering. The

firm would be competing against a well-established Sony with their proven PlayStation brand,

Nintendo with multiple years of experience, and Sega, who also had a great track record in this

sector. The company had to ask itself, could they make an impact in this market with so many

heavy hitters already. This is a tough area to analyze, because without previous experience, the

company can just speculate.

Secondly, Microsoft must have looked deeply at market growth possibility. With so many

players in the video game sector already, would the company have room to grow its business? If

the answer to this question had turned out to be a “no”, they probably would have backed away

from the idea all together. Microsoft was so profitable, they were not be interested in a product to

just jump into a market and earn a quick dime. The company wanted a product that could

become a brand, so it would have been a deal breaker if that were not a possibility.

Next, I believe the company analyzed what amount of investment would be needed for

this project. At that time, the company had around 22,000 employees, and a stock price hovering

around $121 per share. Microsoft had the money, and the people to get the job done. But they

would be taking people away from other proven projects, to work on one that had an unknown


future. If the company chose to just hire more people to keep its existing personnel working on

its tested money makers, they would be allocating financial resources to new hires for a project

that has yet to bring in any revenue for the firm. Also, upon utilizing its resources on this new

endeavor, if it failed, the company would have backed out before it does more damage to the

books; this would be sunk cost that the company would have to try to overcome. There was a lot

of risk in this area, and I imagine it took them months of assessments before proceeding.

Lastly, operating cost had to be thoroughly examined. Everything I discussed earlier in

this paper revolved around getting the project off the ground. The company had to try to

understand what they would do once the project was live, and became a success that gained

market share. Would they continue to run the project in house, what would the pricing structure

be for the hardware in addition to the network, and how would they continue to allocate

resources to this new endeavor. In my opinion, this was another area that really had to be

analyzed through and through before proceeding, because if they could not continue providing

resources to grow this brand, there would be no reason to proceed with development.

In the end, I believe we know the final outcome. Microsoft developed the first Xbox

system and released it to the public in 2001 (three years later from the first idea pitch). The first

system had a rough beginning, with its extra-large size compared to other consoles, and being the

only company to charge an annual fee to play online. Later, the product would rebound with its

smash hit, “Halo”, and finished its life span selling over 24 million systems worldwide. In fact,

the brand had become so popular, Microsoft would go on to create the Xbox 360, which did even

better than its predecessor with 84 million consoles sold and counting. Presently, the company is

supporting its third iteration of the Xbox, known as Xbox One, and it’s expected to be another


success. A great example of how risk vs. reward, and how important it is to think about what a

project needs before taking on the project. In this case, Microsoft got it right.


References



Marshall, R. (2013, May 12). The History of the Xbox. Retrieved June 17, 2015, from

http://www.digitaltrends.com/gaming/the-history-of-the-xbox/

The History of Microsoft - 1997 (Channel 9). (n.d.). Retrieved June 17, 2015, from

http://channel9.msdn.com/series/history/the-history-of-microsoft-1997

List of Million Selling Game Consoles. (n.d.). Retrieved June 17, 2015, from

https://en.wikipedia.org/wiki/List_of_million-selling_game_consoles

Bernard L. Madoff: What a Lack of Ethics Can Do Name: Reginald … · $65 billion over 20 years,...

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