Thursday, March 25, 2010

Remember When I Said...

That Promissory Notes are nothing but Ponzi Schemes? I know that I am beginning to sound like a broken record on this subject, but apparently there are people out there that still are not listening. Low and behold the SEC has charged a New Mexico realtor with fraud and obtained an emergency order to stop him from continuing to sell these Promissory Notes. Of course, he is innocent until proven guilty, but the SEC says he offered investors high returns from 10 to 25% over one to three years. Are you kidding me?

I am truly sorry that people lost their money, but come on people? This was a too good to be true example, if there ever was one. Can you honestly look me in the face as an investor that invested in this garbage and tell me that you thought it was possible to earn 25% over a three year period? Oh but Rick, it was real estate and this guy was a well know realtor in the community. Hogwash. You know better.

The investors who bought into this garbage have to take responsibility for their poor judgment. Read my lips. Promissory Notes are nothing but Ponzi Schemes. Promissory Notes are on Rick's Do Not Buy List, so I am better off not falling for the Promissory Notes trap.

Here is the link to the SEC Press Release on this case. Read it and weep.

Monday, March 22, 2010

The Financial Planners Act of 2010

Once again, Wall Street has managed to get their loopholes in yet another piece of legislation. The Financial Planners Act of 2010 defines what financial planning is and requires anyone who holds themselves out as financial planners to be registered as a "registered financial planner" and subject to a yet to be named financial planner oversight board. This is already a requirement of the Investment Advisers Act of 1940.

The definition of financial planning is defined in this FP Act and anyone who works for a broker/dealer, bank or insurance agency can offer financial planning services, as defined, without having to be a registered financial planner. There is even a loophole that they can have the Certified Financial Planner designation on their business card, but still not be considered as holding themselves out as a financial planner. Or, they could have the Chartered Financial Consultant designation or the Personal Financial Specialist designation and as long as they do not hold themselves out as financial planners, then they do not have to do things in the best interest of the client.

Forgive me but doesn't this seem a*% backwards? Take for example, someone like me who is a Certified Financial Planner and also an Investment Adviser Representative for a Registered Investment Adviser. I am required to do things in a client's best interest. I pay fees to keep my CFP designation. I pay fees to be an Investment Adviser Representative and fees to be a  Branch Office of a Registered Investment Adviser and yet more fees to be a Registered Investment Adviser firm. With this new act, I will now have to pay more fees to be a "registered financial planner." However, the loophole financial planners who do not have to register will not be subject to the ethics and disciplinary oversight of this new board. Yet, they can put CFP on their business card just like me. Of course, this will in no way shape or form confuse clients, will it? How is a client to know who is a registered financial planner and who is not? Will I be allowed to put registered financial planner on my business card and marketing materials? I doubt it. The confusion will persist for clients in trying to figure out if a CFP is also a registered financial planner.

It doesn't take a smart person to figure out that if I can get by with a loophole, then I am going to try and get by with the loophole. Why should I pay more fees and be subject to an oversight board if I just avoid holding myself out as a financial planner? I suspect the broker/dealers will not allow their registered representatives to hold themselves out as financial planners. I further suspect that insurance companies will not allow their agents to hold themselves out as financial planners. Finally, I am sure that banks will do the same. The end result is the people who are already holding themselves out as financial planners and are already registered as investment adviser representatives will now be registered financial planners.

When you think about it, is any real meaningful thing being accomplished here? Other than adding another layer of bureaucracy, I do not think so.

Hopefully, at some point in time with proper education of consumers it will mean something to be a registered financial planner. Time will tell.

Wednesday, March 17, 2010

Remember When I Said...

Regulation D offerings were on my Do Not Buy List? Apparently, the regulators agree with me. At the bottom of this article, you will find a couple of instances where firms were touting Regulation D offerings to investors. Low and behold, they turned out to be Ponzi schemes.

Here is the article:

I'm telling you. You do not want to invest in anything on my Do Not Buy List. Unless of course, you want to lose all your money.

Here is the link to the Do Not Buy List in case you missed it.

Stay smart out there.

Tuesday, March 16, 2010

More Bureaucracy and More Studies

Come on. Did you really think that Wall Street firms were going to allow any legislation to be enacted that changed the game for them? Neither did I.

The Senate bill put forth by Senator Dodd is called the Restoring American Financial Stability Act of 2010. There is a whole lot more bureaucracy in it. Look at the new government entities that will be created if this passes.

Financial Stability Oversight Council
Office of Financial Research
Orderly Liquidation Authority Panel
Office of National Insurance
Investor Advisory Committee
Office of Investor Advocate
Bureau of Consumer Financial Protection
Consumer Advisory Board

Take a hard look at the above list and tell me who is in charge? Does the Investor Advisory Committee have more authority than the Bureau of Consumer Financial Protection? Or, does the Consumer Advisory Board have more authority than the Office of Investor Advocate. Or, does the Office of Investor Advocate have more authority than the Bureau of Consumer Financial Protection. Of course, it is easy to figure this out, isn't it?

Then, let us not forget the very effective use of tax dollars that call for a study to be done. (Yes, I am being facetious.)

GAO study and report on accredited investors
GAO study on self-regulatory organization for private funds
SEC Commission study and report on short selling
GAO study of non-admitted insurance market
Study on treatment of credit card banks, industrial loan companies, and certain other companies under the Bank Holding Company Act of 1956
Study and report on implementation related to Security-Based Swap Markets
Study and rulemaking regarding obligations of brokers, dealers, and investment advisers
Study regarding financial literacy among investors
Study regarding mutual fund advertising
GAO study and Federal agency review of required uses of nationally recognized statistical rating organization ratings.
SEC study on strengthening credit rating agency independence
GAO study on alternative business models
GAO study on the creation of an independent professional analyst organization
GAO study of increased disclosure of Municipal Securities to investors
GAO study on the Municipal Securities markets.
Study of funding for the Government Accounting Standards Board.
GAO study on proprietary trading
GAO study on the effectiveness and impact of various appraisal methods

The poor GAO. Those guys will be doing studies for years. Well, look at the bright side. They will have job security. Hey, wait just a minute. Is this giving job security to government workers, instead of the private sector? Unfortunately, it is true. No private sector study jobs will be created by this bill, I do not believe. It appears that it all will go to the government.

This paints a clear picture of why we should vote these people out of Congress, don't you agree? This type of bill is purely ridiculous. All it does is create more bureaucracy and cost the taxpayer yet more out of their pocket. We have not even seen the Health Care bill yet. I wonder how many new bureaucreacies and studies it creates?

Vote them out. Vote them all out.

Thursday, March 11, 2010

Credit Default Swaps Worry Me

Typically, in a normal transaction where you are betting on the direction of a stock, you can buy a call, which means that you think the price of the stock will go up. Conversely, someone on the other side will buy a put, because they think the stock will go down. One of them will be right and the other will be wrong.

What if you wanted to make a bet against Greece's Sovereign Debt? For example, you would buy a Credit Default Swap that you think Greece's Sovereign Debt is going to default. If you are right, then you get paid by a counterparty, like AIG.

The problem arises when you do not have to own any of Greece's Sovereign Debt. You can speculate all day long that Greece may default. If you have a ton of money, theorectically, you could buy tons of Credit Default Swaps and by doing so, you are in effect putting undue pressure on Greece's Sovereign Debt. As a result, speculation could in effect destroy the credit rating of Greece's Sovereign Debt.

Personally, I do not think that anyone should be allowed to speculate in this manner. This is exactly what got AIG in trouble. All these speculators bought Credit Default Swaps and AIG was the one selling them. There were so many speculators with tons of money who bought tons of Credit Default Swaps, that there was no way for AIG to pay them all their speculative gains. Therefore, the U.S. Government came to the rescue.

As of today, nothing has changed in regard to this type of Credit Default Swap speculation. As a result, I expect to see history repeat itself.

This is like if I wanted to short a stock, I could do so and not have to find someone who will allow me to bet against their stock. If I can go "naked," then I could speculate wildly on just about any stock. You are supposed to only be able to short stock if you can borrow it. The problem with the Credit Default Swaps is that they are going "naked." They do not have to borrow or own, for example, any of Greece's Sovereign Debt. Therefore, in my opinion, they could take down Greece's Sovereign Debt with a ton of speculative bets.

I do not know about you, but I do not like this situation at all.

Stay tuned.

Thursday, March 4, 2010

Section 7103. Establishment of a Fiduciary Duty

Okay. They are finally getting close to passing this law, but it includes a study that may delay its implementation for a few years. It seems that the government wants disclosure for retail customers, but they do not know what a retail customer is, so they have to have a study. In addition, they want disclosure for retail customers, but they have to have a study to determine what to put in that disclosure to retail customers.

Right now, their definition of a retail customer is:

(A) receives personalized investment advice about securities from a broker or dealer; and
(B) uses such advice primarily for personal, family, or household purposes.

Of course they are not sure about this, so there will be a study to determine the proper definition of a retail customer.

A couple of things jump out at me in this definition. Registered Investment Advisers must be exempt, because they are not listed in Section (A) above. (See page 1278 of 1705 lines 7, 8 & 9)

I guess that a retail customer is something that only brokers or dealers work with, not investment advisers according to this bill.

The second thing that I noticed is that in Section (B) above, there is no provision for "businesses, charitable organizations, pension plans, or trusts." I guess the House Financial Services Committee does not think that these need the same protections as their definition of retail customers.

Another curious thing that I find in this bill is that the term "customer" does not include an investor in a private fund managed by an investment adviser, where such private fund has entered into an advisory contract with such adviser. Excuse me, but would not the scandulous Mr. Bernard Madoff be considered a manager of a private fund? Or, would not the feeder funds that feed Mr. Bernard Madoff money, be allowed to continue business as usual as a result of this exemption?

Of course, the more I read into this Section 7103, the more errors that I find. Now, I see later in the bill that they added investment advisers to the definition of a retail customer. See page 1280 line 10. This must be a staffing mistake. Why is it not on page 1278, but it is on page 1280? Looks like the makings of a Technical Corrections Bill that will follow. Unless of course, someone reads this blog and fixes it beforehand.

Later in the bill, brokers or dealers are going to be subject to not only FINRA rules, but also the same rules that investment advisers are subject to upholding. Wall Street firms must have slipped on this one. I am surprised that they did not lobby out of this one. After all, there are a ton of brokers out there and dealers too, who have blemishes on their record. Routinely, these brokers and dealers have not had to tell their customers about their backgrounds. Apparently, now, if they are subject to the same rules as investment advisers, then they will not only have to tell their customers about their backgrounds, they will have to do so in writing. This goes for insurance agents and insurance company broker/dealers. This will be a interesting development. I know several advisors who have fines, suspensions and the like on the records, but they never tell their customers about them. What do you want to bet that these type of unscrupulous advisers fail in their efforts of full disclosures?

This rule ends with the granting of the SEC to obtain a study to determine what a retail customer is, what potential conflicts of interest are presented, the differences between investment advice from various providers like brokers, dealers or investment adivsers. Then, after the completion of the study, the law gives the right to the SEC to implement the rules.

The major points of this study that they need to clarifiy are the following:

1) what is a retail customer? (I'm not kidding.)
2) what is the range of products and services sold or provided to retail customers and are the sellers under the watchful eye of the SEC?
3) how are these products or services sold to retail customers, what are the fees and conflicts of interests that may arise as a result?
4) what should customers receive prior to purchasing these products or services and who is the appropriate person or entity to provide such information?
5) they want to ensure that reasonably similar products and services are subject to similar treatment and disclsoure requirements.

Did you notice that I did not mention anything about a fiduciary duty? Well, the Wall Street firms may believe that they have dodged a bullet, but guess what? The fact that this bill, like I mentioned above, subjects brokers or dealers to the same rules as investment advisers, this means that they will be subject to the fiduciary duty requirements. Whoops! Wall Street needs some new lobbyists. They failed to catch this one.

Boy. I do not know about you, but I feel a lot safer now for "retail customers," don't you? I sure am glad we have the government to take care of us. Yes, I am being facetious.

Remember When I Said...

Promissory Notes are nothing but a Ponzi scheme? Well, once again, yours truly has been proven correct. Of course, the folks in this press release are innnocent until proven guilty in a court of law. Here is the link:

It seems that this couple promised returns of 9 and 16 percent to investors. That right there should have been your first clue that this was bogus. Oh but, Rick it was a real estate investment. Well, that certainly makes all the difference...NOT! No it does not. It does not matter what it is as far as I am concerned. Promissory Notes are nothing but Ponzi schemes. They are structured EXACTLY like a Ponzi scheme. Investors put in money and are paid interest on their own money. As long as new investors keep coming in, then investors keep getting paid. However, when the stream of new investors stop, then the original investment somehow mysteriously disappears into "an investment." Like a great real estate investment. Of course, you cannot get your money back, because the "investment" has to have time to grow. After all, they told you this going in. Don't you remember?

Get this people. Promissory Notes = Ponzi Scheme. Do not EVER invest in a Promissory Note. If you do, plan on being a victim.

Be smart out there.