Another Financial Risk Regulator?

Some in the administration and Congress have suggested that the Federal Reserve act as a so-called systemic risk regulator. That would allow the Fed to provide implicit government guarantees. It would probably also involve labeling institutions as "too big to fail."

But this may increase chances they will fail, and that the taxpayer will then wind up paying the bill.

I repeat what I have said countless times: The Fed’s prime purpose Is to maintain the value of the currency, not to focus its attention elsewhere, as the current administration and Congress desires.

Another suggestion coming from politicos is to have a systemic risk adviser in the form of an independent government agency. It would have no regulatory authority, but would provide a so-called “expert” panel and the ability to speak to and make suggestions to Congress and the administration. Something like the National Transportation Safety Board.

I see a major problem with any agency with regard to such risk. Because nothing will be done by Congress when it gets suggestions of this kind. The way nothing was done by key Congressmen about Fannie Mae, Freddie Mac and their congressional overseers, when those entities were signaling severe difficulties, leading to the current financial debacle.

This lack of authority is a major defect. An agency that could not order things done would accomplish nothing.

Remember the “lets roll the dice” retort, as one of our noted politicos famously said, when warned about looming financial disaster with Fannie Mae and Freddie Mac?

FINRA and Your Investments

FINRA, the independent Financial Industry Regulatory Authority, operates from Washington, DC, and New York, NY, with 15 District Offices. You will see them mentioned in financial advertisements.

FINRA is involved with registering and educating industry participants. It examines securities firms; along with writing and enforcing securities rules.

FINRA also attempts to inform and educate the investing public, and provides trade reporting and other industry utilities. The Authority administers the dispute resolution forum for investors and registered firms.

The organization performs market regulation under contract for the NASDAQ Stock Market, the American Stock Exchange, the International Securities Exchange and Chicago Climate Exchange.

They are of help. But only to those who constantly are aware of investment principles on their own.

Too-Big-to-Fail Financial Institutions

Some financial institutions are too big to operate efficiently. Always were. The fact they have been made smaller amidst the financial meltdown and are still operating, is an indicator they could have always been smaller.

In fact, when this administration was in its hectic bailout mood, bigger was deemed to be better. But putting together junk to make bigger junk was really stupid as a means of such bailing out of the financial community.

I always felt it was mainly executive ego that justified why they grew apace in the past. Their need to access capital was only partially attained by mere size.

If too big to fail is policy, why was Lehman Brothers allowed to fail? That failure was a fiasco for the economy that is still being felt today.

Then who is too big?

The Public Should Watch That Money Supply!

It is unfortunate that the more college students we graduate in America, the more stupidity we have created among the public. College does not appear to educate.The Media will never adequately take up that slack.

Because if the public were truly aware of the effects of the monetary inflation we are setting up for ourselves and future generations, we would be shouting from our roof tops at the government to stop the mess.

The average increase of our monetary base, on average, has gone up about 5% since 1961. For the Y2K anticipated emergency and the 9/11 catastrophe, it went up 10%. But today the increase is well over 100% and still rapidly rising.Yet, we listen to administration and Federal Reserve officials who keep telling us all this will be taken care of.

Uncle Sam issues bonds to pay for its debts but let’s face it and call it what it truly is. Those bonds will not easily be refunded.

There is little likelihood the economy will expand to soak up any of that paper the government is, in effect, printing. Inflation will eventually start to show up. Not immediately, but as soon as the economy starts to fully recover.

It may take some years. But then, watch out!

Will High Taxes Alone Reduce Charitable Donations?

Not only do higher taxes help reduce funds being donated to charities, as evidenced from past experience, there is a possibility that there will be future political influences.

These will occur in the form of allowable donations and preferences. Certain types of donations to favored charity types will get tax exemptions, that other charities may not get.

Thus, ideology and political persuasion may take over. Remember, it once was tried in an attachment to a previous Pension Protection Act in Congress. It can happen again, especially with this politically-pointed administration and Congress.

Definition of a Real Stimulus

A stimulus plan during a recession is supposed to stimulate the economy with a minimal amount of side effects. It must do so quickly if it is to be a practical stimulus.

That is why a quick tax cut on all income always works, Why tax cuts on capital gains always work. Why corporate tax cuts are tremendous boosts to an overall depressed economy.

These are all job generators. Experience shows they work FAST.

Furthermore, they do not change the country’s political and social infrastructure. They do not provide political payoffs.

A stimulus is NOT supposed to promote voter turnout years from now, or change the form of government years from no. It may cause inflation for our children and grandchildren. Yes: Subsequently, It may stimulate the economy years from now.

To some politicos, they may well impersonate a stimulus with the hope of being the remedy. They are a political opportunity.

But a waste of lots of money.

The upshot of all this? We will suffer an even deeper recession. To now, only a small fraction of stimulus funds have been spent, with most earmarked a year or two down the road. What we get will be late and only add to upcoming inflation.

Remember the Soviet Union with its periodic Five Year Plan Stimulus efforts? When did they ever work?

A Financial and Legal Analytical Can of Worms?

Law suits arise when credit rating agencies who judge the quality of bond or derivative issues are considered the cause of investors’ loss of money.

Making it easier to sue will open a can of worms.

The First Amendment is supposed to guard free speech. That usually protects financial analytical reports. Including opinions on structured Investment vehicles or SIVs, or derivatives, or any form of corporate and municipal bond.

A question arises in relation to an underwriting involving credit opinions, where investors lost money. As they did in the past financial meltdown.

Can analysts and their employers be sued for malpractice if their opinions have been wrong? Or are they covered by the First Amendment? What does any court decision do to those who evaluate due diligence in the future?

A move is on to sue credit agencies for alleged malpractice. An eventual decision against them will adversely affect all analyst legal positions and considerations in the future.

Conflicts of Interest and Credit Rating Agencies

A Credit Rating Agency Reform Act was passed in 2006. Nevertheless, much was left to be done to correct problems in the credit rating industry, as evidenced by the recent financial meltdown. They may have been one of the key causes of the debacle and not Wall Street “greed.”

The bulk of credit ratings are done by Moody’s, McGraw-Hill’s S&P, and Fitch Ratings, the three largest of just a handful of government-approved services.

Critics say they did poor evaluations of credit-default swaps and subprime debt issues. And thus contributed, to a great extent, to the financial downturn. There were also charges of conflicts of interest with regard to payments to these firms who do the evaluation services by those who issued the debt obligations.

The solution? What is needed is more competition. That means more credit evaluation services being allowed by our regulators and more diligence by borrowers. That would be the ideal way to prevent serious credit rating problems from developing again.

There is No Such Thing as Average Investment Return

Investors are lulled into a complacency with the false knowledge they have acquired or may acquire “average” returns. They hear what securities have earned on average going back through the years and they then project these figures into the future.

To begin with, these long-term averages are wrong. Indexes on which they are based may be skewed. Many years ago, companies that failed may not have been included in the statistics used, so that the results were overly positive.

Secondly, there are steep investment experience hills and valleys. You may need the funds just when your portfolio is in a funk or has recently been in one, and hasn’t had time to average out.

So: Whenever you hear securities will bring you average returns, think again.

We Are Not All Familiar with Randomness

Many of us are not familiar with the odds of randomness. It therefore affects our outlook on finance.

For example: With a toss of 100 coins, heads or tails, there is a 75% chance of a streak of 6 or more. And a 10% chance of a streak of 10 or more

Look what this lack of knowledge does when we observe what analysts say about securities’ markets. Why they are up or down. You usually hear comments after market closings about events which really reflect randomness.

Athletes or sporting event progress is not the purview of this blog, but the same randomness prevails, and should be kept in mind.

Public Pension Funds May be Pulling Enron Fiascos?

Government employee pension funds are usually guaranteed by localities and each state involved, They invest in securities and consequently are affected by the ups and downs of the marketplace. The past financial meltdown has hurt them as it has other institutions and individual investors.

Pension funds also are hurt when the governmental overseers do not add sufficient funds to meet obligations and promises they have made to their employees. And this has been the rule rather than the exception in too many instances for years.

How have many of these government entity administrators coped with the problem in recent years? By cooking the books. By estimating higher returns on their portfolios than they will be able to possibly earn in the future.

The amounts of the shortfall? Billions of dollars per each state in America.

Retirement Planning Hardly Ever Works

Retirement planning by advisers is always arranged with models. They take into account investments and their diversification, along with outlay planning, and any number of possibilities. The Monte Carlo simulation is a well-known model used by investment advisers for this purpose.

But this investment planning fails to work in real life for any number of reasons. Obviously, a major financial market debacle would be one. But other unforeseen events are bound to happen; such as illnesses, a loss of a job or business. Then unexpected educational expenses may crop up. The result of a lifetime of retirement planning is often failure.

The solution? Be realistic. Have an anchor for your future, just in case. Be prepared to work at least part-time past what you had originally thought would have been retirement age.

What is "Fair" in Taxes?

We will have arrived at a point where we can say we have truly educated our children when we have taught them basic economics, free of the taint of politics.

That point will have arrived when we can have a discussion in our schools, and the media, about what are “fair” taxes. Until we do, we will continue to have a culture war in this country.

Even a 10-year old should know whether it is fair to have, for example, half and often more of his or her income confiscated by government.

So perhaps by the time they get to vote they will not be deceived by politicians who tell them that taxes must be fair by “soaking the rich", that is, anyone who happens to earn more than they do.

Credit Default Swaps Are Back Again

Credit Default Swaps are back and that’s not necessarily bad.

They’re an insurance policy in the event the issuer of a bond or note defaults. They come in handy in volatile markets.

Credit Default Swaps make it easier to sell bonds and notes because traders, including hedge funds, are willing to deal and trade in them to facilitate the bond/note markets.

Of course Credit Default Swaps were the type of obligations that Bear Stearns and American International Group (AIG) and other meltdown victims had. They were just overwhelmed.

The securities’ reputation got sullied but in time will be repaired, as they ought to be. They are a valid and useful investment vehicle.

Estimated Future Costs of “Social Security, Medicare and Medicaid

It’s being estimated that by 2050, Social Security, Medicare and Medicaid, as they are now constituted, will take up nearly the entire federal budget. By about 2080, Medicare alone will comprise the entire federal budget.

This projection is obviously impossible to sustain. There will have to be patching done by our politicos along the way. But it does point up the path of stupidity those politicos in office today have set forth for us, our children and grandchildren.

Congress is creating a bankrupt system.for us and our descendants. Solutions can only involve less services, benefits, rationing and higher taxes, as well as inflation we have never experienced before.

Yet, Americans consider this treatment “business as usual.”

Are Ponzi Schemes Possible In Collectibles?

The whole idea of a Ponzi fraud is to pay off old investors with the proceeds of funds from new investors.

Taking that as a basic definition, Social Security is a Ponzi scheme run by the government. Yet, few of the public or the media understand or acknowledge the fact.

With ordinary financial investments, there eventually is some sort of accounting that may expose Ponzi schemes. When everyone wants their money back pretty much at once, and there isn’t any to give them. Or if there never was any backing for their so-called investments, frauds are eventually uncovered.

Most investors have no idea how easy it is to become a victim of a Ponzi scheme in collectibles. I speak now specifically of some of the modern art that has been peddled over the past fifty or so years. Particularly work of those who were more celebrities than they were artists.

Their talent was purely and solely in the mind of their publicists and agents. The subject matter is said to be so esoteric that many so-called “experts” have made careers out of these artistic “talents.”

You could even have a house painter cover a sheet of canvas with white or red paint and create millions of dollars worth of art that such questionable experts will fawn over.

If push comes to shove, the values of such art can be practically nil. Everyone relies on the good old Bigger Fool Theory. That someone dumber than them will come along and bail them out by buying their fiasco.

The Mark-to-Market Rule is Here Again?

The mark-to-market financial accounting rule is rearing its head again. It will hurt the banking picture once more, as it did in the recent past.

The Financial Accounting Standards Board, or FASB, again is considering the use of this standard, which pegs the value of financial assets to the volatility of the securities markets. Banks hate it because it helps put their earnings and balance sheets in constant peril.

I have always maintained that the rule was one of the main factors in the sub-prime financial meltdown. Because it was always hard to price especially volatile securities, some of which had too limited a market for reliable valuation. And as a result of the latter mispricing, short sellers were able to wreak havoc on banks even further, to the extent of the collapse we witnessed.

Yet, instead of taking this discrepancy into account early to prevent disaster, mark-to-market financial accounting rules were kept on. After the meltdown, rule adjustments were allowed. Too late.

I was once a senior banking and insurance analyst. When the books allow for the sequestering of questionable assets and the analysis is done correctly, you do not court disaster by posting conventional bookkeeping numbers during financial emergencies. It can prevent short-term psychological disasters that fester into long-term catastrophes.

How to be a Smarter Financial Consumer

What is the bottom line in being a smart financial services consumer? Reading the fine print is basic. It’s not complicated when you bother to read.

Another is remembering that there is no such thing as a free lunch in life. You pay for what you get. In one form or another.

Also be sure you figure out what you are getting that is supposedly free. Figure out comparable cost to see what you are getting and what you will pay for, in return for something better. Take the time to put pencil to paper and use a calculator when necessary. Most times you don’t have to be a math whiz.

Above all. remember that politicians give you nothing free. Anything the government gives you is your money–either in the form of direct or hidden taxes you pay, or cheaper, more worthless currency down the road.

Unfortunately, too many politicians make an art of getting votes on the premise that all of you are looking for that free lunch, all the time.

Inflation and Your Investments

Here is a rule of thumb as to what can happen to future interest rates. This is due to the probability of runaway inflation because of huge government deficits.

In a 2003 report by a Federal Reserve economist, there was a calculation of the effects of government debt and its impact on long-term interest rates. This was done before the current financial meltdown and the resuscitation efforts of the Administration.

The report concluded: "A percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points. Similarly, a percentage point increase in the projected debt-to-GDP ratio raises future interest rates by about 4 to 5 basis points."

In other words, the reflection of inflation in the form of higher interest costs.

As I recently noted, inflation induced by heavy deficits does not arise rapidly during a recession, but it jump-starts once recovery gets going. Then it quickly gets out of hand.

And then all the theory economists use to remedy the matter gets stymied by politicians who know the medicine will cause an economic pratfall. Any economist remedies are over-ruled by political considerations of forthcoming elections.

Be certain your investment policies then are inflation-proof. Keep tuned.

The New, Upcoming Financial Crisis

Leave it to politicians to make a real hash out of ordinary, simple problems. What was a simple sub-prime problem, that normally would inevitably lead to a minor recession, has become, in reality, a near Depression, comparable in many ways to that of the 1930’s.

Students of the Great Depression now see how Franklin D. Roosevelt overreacted with over-spending. Then he over-taxed business and created a Depression psychology that prevailed unabated. until the Second World War acted as a stimulus.

The same is occurring today. But the extraordinary spending is taking its toll as it inevitably must. In the form of business-stifling taxes, and even more so, in eventual inflation.

But inflation is a slow starter. That’s because poor economies hold back prices for awhile. At the sign of a full recovery, however, prices will start to jump.

Unfortunately, the Main Honchos in government, responsible for the new, real financial crisis-to- come, may be out of office by then. And the blame will be placed on the shoulders of administrations who will be around to attempt to clean up as best they can.

Don’t worry: Stupid voters and biased historians will clear the true culprits of any responsibility.

A Sign of Over-Regulation of Financial Matters

We are told that regulation is important to prevent financial meltdowns. Much of what we get, however, does very, very little, to prevent this. What it does is add to the cost of government and to the services for which we pay.

Today’s example: A booklet a mutual fund company has to send to its investors, entitled “Privacy.” It has to do with how they share information with third parties. How many investors must be told this information periodically? Are they really interested to know this? Over and over again?

This information already is in the regulations, and investors take much of the tiny-print they do not understand for granted.

One thing is certain, aside from the government appearing to be doing something: Each notification comes, eventually, from the investor’s pocket.

This is all the doing of government regulation, not the fund’s idea, I can assure you.

Do We Need an Investment Risk Regulator?

Having an investment risk regulator is an attempt to prevent the current type of financial crisis that I consider near-Depression.

First, I don’t believe anyone can easily identify "systemic risk." At the time financial institutions were investing in sub-prime mortgage-backed securities, they all believed they were not taking undue risk. They did have recognized financial models that all the regulators knew of and approved.

No federal regulator could identify undue risk at the time. And as for the Federal Reserve, it’s job was not systemic risk, and still isn’t. It’s primarily to maintain the value of the currency. Incidentally, it can do a better job of that.

Also, since 1978. the Fed has had to help enforce the Full Employment and Balanced Growth Act, otherwise known as Humphrey-Hawkins. That conflicts with their prime function.The law, in fact, creates an inflating bias.

Congress failed miserably with regard to the financial meltdown, but no one leader in Congress wants to recognize that or take the responsibility. The government-sponsored Fannie Mae and Freddie Mac and their congressional overseers created and promoted toxic assets that financial institutions all over the world bought.

Want more of the same? You will get that despite the added risk regulators.

Government Regulation of Excessive Investment Company Fees

Does the government have a role to play in the regulation of investment fees?

We know that they are involved with credit card charges, mortgage fees and so on. But what about charges such as those in mutual funds?

I have never recommended the use of money managers because most do little for what they are paid. I mostly recommend index-related funds. I have explained why in detail many times elsewhere.

Yes: Cost of managing one’s investments is the best standard and the most decisive characteristic for the selection of any investment decision.

Nevertheless, who is to say what is too high? Especially when government gets into the act.

Beware Stocks-to-Buy Lists

The stocks-to-buy lists are great for filling space in the financial newspapers, magazines and blogs. They make good reading for uninformed investors, flailing about for ideas from any direction.

Those lists often do little for the investors who take the advice. That’s because the prognosticators who devise those lists are usually way off the mark.

It is very difficult to pick securities that are going to go up in value in a relatively short term. That’s what lists are about. Top executives in the companies themselves know little about how well their corporate securities will do in the marketplace where conditions other than their company fortunes may affect the market value.

How can you depend upon a security analyst working from a perspective outside the company? That is why index funds so often outperform managed security portfolios.

Is Buy and Hold Securities Strategy Good or Bad?

The answer to buy and hold securities strategy: Is it good or bad, is not as simple as it always appears in media articles.

The factual answer should always be: It all depends.

It depends on the original investment strategy you chose when you made the securities purchase. What was the purpose or intention of your purchase, and the context of the decision in terms of your age, goals, etc. And the discipline you decided to employ to keep to that strategy..

Provided, of course, you are one of the few investors lucky enough to be really disciplined .

Still Taking Advice From Investment Advisers?

Even after getting burned in 2008, folks keep going back to expensive advisers which cost them as much as 25% or more of their investment income. (Calculate a fee of 1 ½% of your assets against your total investment income and you get an approximate idea of the money advisers get from clients each year.)

In fact, with the current deep recession, the trend appears to still be for asking advisers for help when these same advisers were generally unable to help prevent the damage from the the recent market debacle.

You can easily invest in index vehicles using common sense as I have often said.

And let me repeat what I have always recommended. Avoid advisers, except for necessary lawyers, accountants and tax experts you may need.

Why Not Buy Corporate Junk Bonds When the Media Pundits Say No?

Securities analysts love to warn buyers or holders of corporate bonds, especially those with lower grade or “junk” status, to beware of potential defaults when times are bad. That is investment nonsense.

Analysts love to go to extremes, whether optimistic or pessimistic. Yes, defaults are bad. But potential defaults are always priced into the bond prices.

So whether default rates go from 5% to 10%, when interest rates are as high as 10%, the investor is still way ahead of the game. So, the adjusted return will still be way ahead of other investment returns available.

The trick is to diversify against default risk of any corporate bond issues. You do that by investing in low cost bond mutual funds that may hold a hundred or more bonds.

The Danger of a Too-Weak Dollar

Most folks don’t care about a weak dollar. They know about sports scores and statistics relating to athletes, and thus they are also certain beyond doubt about who to vote for in government. That’s because they are influenced by sound bytes when it comes to political news. It’s sports and other circuses that get their deep attention.

So a weak dollar that concerns whether foreigners or foreign governments will buy U.S. Treasury bonds has no meaning or importance to them.

When they have heavy inflation at home because the government has to literally print money to balance the budget, they will take notice. By then they will probably blame the wrong folks for their financial woes, taking their cue from the media sound bytes.

While they sample their fill of sporting events.

Beware of Politicians and Bureaucrats Regulating Speculators

They are at it again. When commodity prices go up, you can be sure the politicians and bureaucrats will be blaming speculators and attempting to restrict them in some way. When prices go down (thanks to speculators) we hear nothing, while speculators (of course) get no plaudits.

Politicians don’t take courses in basic supply and demand economics. Bureaucrats are government employees who serve at the behest of the politicos, so we receive such as the proposed current regulation of dreaded speculation.

But independent research shows time and again that attempts by government to stifle markets that reflect supply and demand fail miserably. Those attempts are forms of price control and are doomed to failure. There are always unintended consequences which are worse than temporary price increases in trading markets.

Open markets are generally honest. Rationing leads to restricted, black markets, where political machinations can get enmeshed.

Politicians looking for votes cater to base instincts, so we get what we sow. Unfortunately.

Repeating the Mortgage Debacle

Isn’t it amazing? Barney Frank, the loquacious Democrat Rep of Massachusetts, who has vehemently denied that he had anything to do in the past for cheer leading Fannie Mae and Freddie Mac from going overboard in promoting subprime mortgages, to let the poor own homes, even using the expression “roll the dice” to do so, is at it again.

After the government-sanctioned agency has lost tens of billions of dollars, while acting as the instrument of the financial meltdown, he again has been sounding off about offering easy loans.

His implication is right about one basic: On balance, most voters tend to have short memories around election time.

Investing is Not a Zero-Sum Game

Investing is not a zero-sum game for all investors. Investing need not be a system where someone has to outsmart someone else in order to win. Where there is a loser for every winner. Yet, that is the way most Wall Street would-be pundits operate today.

The truth is, there is no perfect investment strategy. Sticking to one’s strategy; that is discipline, is the answer. Discipline is the solution because it logically helps tilt the odds for investment success in your favor. I have done my research and checked that of independents with no axe to grind, and it has taken me years.

Adjusting the odds for success favorably is the ultimate investment goal. Discipline of strategy and not changing it constantly, does that.