Wednesday, May 11, 2011

New Addition to My Do Not Buy List

Today, I would like to add another item to My Do Not Buy List. I have to do this without naming names, so if you are promoted something like this by an registered investment adviser, or a brokerage firm, then hopefully, you will recall this article.

Apparently, there is a company out there that loans money to credit worthy investors. Supposedly, these people who need money, cannot get a favorable loan from their local bank, or just prefer not to do business with them. One of the credit score qualifications is 660 or above. So, what happens is this firm attracts investors to put up money for these credit worthy borrows. The investors who put up the money, then are entitled to a high return of 8 - 10%.

Your first clue is the bogus 8 - 10% return being promoted. Your second clue here is that someone with a credit score of 660 or above can most likely easily get a loan in today's marketplace less than or the same as 8 - 10%. My question becomes, why should they go this route when any local bank or credit union will do?

If you dig and little deeper and think about this, then you will see the true picture.

I was just solicited today from a new registered investment adviser who is offering the investments from this lending firm.

The way I see it is the original investors who supplied the funds for this lending firm want their money back, because it is not working out like they planned.

So, what is the lending firm's solution? They created a new registered investment adviser firm that will raise money from guys like me (I'm not that stupid) and then bail out the original investors from the lending firm who want out. For the privilege of buying this credit paper, (or is it toilet paper?) the investor has to pay this new registered investment adviser a 1% fee that grades down a little bit, but not much. Then, the other firm that acts as the feeder fund (where have we heard about feeder funds before? Oh yes, Bernie Madoff) will also charge their fee on top. The total fee could be 2 -2.5% depending on your favorite feeder fund.

Want to hear something hilarious? The lending firm normally charges 1% for their services. Out of the goodness of their heart, they are going to waive this 1% fee for investors who give money to their new registered investment adviser firm. The truth is they own the registered investment adviser firm and they are charging the 1%, so they are not really waiving anything. The money is only going from the left pocket of the lending firm to the right pocket of the registered investment adviser firm that THEY OWN! I told you that was hilarious, didn't I?

The investor who buys this opportunity for high income (don't make me laugh) will instantly have no liquidity after they buy it. You see, this was the problem with the original investors who put the money up for the lending firm. They did not like the way things were working out, so they are screaming for a solution. They have no liquidity. Did I mention that they have no liquidity?

This lending firm created their own brand stinking new registered investment adviser firm full of conflicts of interests, by the way, and decide that they will reward these original investors with a buy out from other registered investment advisers who are stupid enough to put their clients in this investment. Is this really an investment? No.

It is a black hole with no liquidity and no guarantee of a return of principal.

They will tell you otherwise, of course. They will say there is a secondary market for these investments. Oh yes? Where is it? On the New York Stock Exchange? Not hardly. THEY are the secondary market! Let me get this straight. The original investors, in my opinion, want out. There was no secondary market for them. That is until they created this new registered investment adviser out of thin air. The feeder funds will be the solution for the original investors. They will get out with their original investment. But, the investors late to the party, they will not. When they want to liquidate, then they will find out how small and mostly non-existent that secondary market is for them.

This lending firm apparently is finding out that they are in competition with banks and credit unions. They have a stable of unhappy original investors who want their money back. Further, they are also finding out that they need an endless supply of feeder funds to keep their juggernaut going into the future. I predict that this firm will eventually go out of business once the banks get hot and heavy back into lending to consumers. Until then, this lending firm may have some limited success.

Sadly, I have to assume that there are people lining up for this high income opportunity. The readers of this blog will be protected from "opportunities" like this one. Drum roll, please! Here is your new addition to My Do Not Buy List.

Consumer Credit Funds.

They may call them something similar like Consumer Loan Funds, or Short Term Credit Funds. Be aware of differences in how they may be promoted. Be on guard!

The weird twist to this scenario is that this is all perfectly legal. Just like everything else on my Do Not Buy List.

The bottom line is Do Not Buy this ever!