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 11, 2010
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)
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173rfs.txt.pdf
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.
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)
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173rfs.txt.pdf
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:
http://www.sec.gov/news/press/2010/2010-31.htm
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.
http://www.sec.gov/news/press/2010/2010-31.htm
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.
Thursday, February 18, 2010
The Johnson Amendment
No. Not this Johnson. Senator Tim Johnson, a Republican from South Dakota who has put forth an amendment to peform a study on the Fiduciary Duty. An 18 month study no less.
Didn't the SEC already do a study on the fiduciary issue called the Rand Report? As a matter of fact they did in 2008. A lot of good it did as we all know by now.
Once again, the consumers of America are getting pushed aside due to political posturing on both sides of the isle. Get this people. Wall Street has all the money to pay for lobbyists and consumers do not. Therefore, it would take "an act of Congress" to change the status quo in Washington, D.C. right now. I am not holding my breath. They are not going to pass any meaningful legislation around fiduciary duty protections for consumers. As I stated in a prior post, as long as you have revenue quota requirements from Wall Street firms, you can never have a fiduciary duty for consumers. It is simply impossible. There is no way you can argue the point otherwise.
If you are a consumer, then do not expect much to happen in your favor. Unless of course you do business with a financial advisor who really does things in your best interests and has no relationship whatsoever with a Wall Street or FINRA firm. These fine folks are called Registered Investment Advisers.
Didn't the SEC already do a study on the fiduciary issue called the Rand Report? As a matter of fact they did in 2008. A lot of good it did as we all know by now.
Once again, the consumers of America are getting pushed aside due to political posturing on both sides of the isle. Get this people. Wall Street has all the money to pay for lobbyists and consumers do not. Therefore, it would take "an act of Congress" to change the status quo in Washington, D.C. right now. I am not holding my breath. They are not going to pass any meaningful legislation around fiduciary duty protections for consumers. As I stated in a prior post, as long as you have revenue quota requirements from Wall Street firms, you can never have a fiduciary duty for consumers. It is simply impossible. There is no way you can argue the point otherwise.
If you are a consumer, then do not expect much to happen in your favor. Unless of course you do business with a financial advisor who really does things in your best interests and has no relationship whatsoever with a Wall Street or FINRA firm. These fine folks are called Registered Investment Advisers.
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