Your State and City Pension Facts

 

Finally there is talk about state and city government pension problems being severe enough to be a major factor how these entities are being rated by credit agencies. The higher the ratings, the lower the cost of running state and local governments.

We know that state and local pensions are underfunded. That is, there are not enough earnings to warrant the amount of pensions promised.

You cannot assume you will earn 8% or more on pension investments when you can safely get only 3% or 4% from those investments. So politicians will have to learn to promise less and even reduce pensions, or invite bankruptcy. The latter will perform the necessary reduction whether the pensioners like it or not, so why not have everyone come to a voluntary decision to get pension matters settled? (See the Earl J. Weinreb NewsHole® comments.)

Avoiding Heavy Bank Regulations to Safeguard Banks

Further to my previous comments about U.S. government regulation of banks with the Dodd-Frank Act of 2010, I have an observation that differs a good deal from much of media comments. (I speak as a former senion bank analyst for a major Wall Street firm.)

The banks have added substantially to capital in recent years, as advised by domestic and international banking regulators. All those strengthening actions will mean nothing if banks are forced to mark (or value) their assets to the market on a daily basis, as was the case during the 2008-09 financial debacle. You cannot price illiquid assets during a financial meltdown. (See the Earl J. Weinreb NewsHole® comments.)

Bank Rating Downgrades Despite Bank Regulations

I mentioned in a previous blog the Dodd-Frank Act of 2010, which was supposed to make banks stronger, among its other panacea provisions, and I noted the credit-rating agency downgrade despite the legislation.

There is yet another way to measure the fact that big banks are not deemed as secure by investors as they were before the Dodd-Frank Act. Simply look at the cost of insuring bank debt.

The cost of insuring $10 million of debt for five years is an excellent indicator that’s available with regard to the credit standing of major banks. And it’s been high, at least as an investors’ perception of that risk.(See the Earl J. Weinreb NewsHole® comments.)

More Bank Regulation -- Still Bank Rating Downgrades

The Dodd-Frank Act of 2010 was supposed to make banks stronger, among its other panacea provisions that have taken thousands of pages of explanation, still not fully complete.

Yet, the large U.S. banks, that Dodd-Frank was supposed to strengthen, apparently are more of a credit risk for investors today than they were two years ago, when without all that fresh governmental regulation. 

They have been sharply downgraded by an independent credit-rating agency. (See the Earl J. Weinreb NewsHole® comments.)

The Odds of Tossing Coins--Heads or Tails

It’s interesting to note observations and tests of folks who are asked to bet or choose heads or tails when tossing coins.

The odds of a coin toss being heads or tails is always 50-50. Yet, when for example, head comes up twice in a row, a large percentage of players will think that the odds will then favor tails as the next result.

True, over a total of as many as 1,000 coin flips, you may not get exactly 500 heads and 500 tails, but you can expect a figure extremely close. Still, many folks continue to believe that over the shorter-term, a following coin-toss will have a bearing on past results. (See the Earl J. Weinreb NewsHole® comments.)

The Volcker Rule's Impractical Regulation

Regulators in Washington have little idea of what they are doing. They are often wrong. And they are not penalized for their errors.

Under the so-called Volcker Rule, banks are not supposed to trade with their own money. That sounds good to politicians because it appears simplistic enough to sell to voters who haven’t a clue about banking.

But funds are intermingled and the extent of supervision depends on size and there are simply too many “ifs” in the picture. Political influence also rears its ugly head. (See the Earl J. Weinreb NewsHole® commentaries.)

Playing The Options Market?

Options offer an investor the right but not the obligation to buy or sell a security at a set price.

Options also protect shares from under-performing. And

to make money when market conditions are extreme.

To invest in options, you must take time to learn about them. Know the difference between a call and a put, strike price and all the rest of arcane terms.

There is no quick options course, Take your time because of the complex nature of this aspect of the securities business.

Do not attempt to get involved unless you learn about options both academically and in practice. Therefore, run through fantasy dry-runs with no funds, just to see how you would have done with real money.

Then use your own capital. (See the Earl J. Weinreb NewsHole® commentaries.)