The Subprime Trump Card:Standing Up To The Banks
Posted by seumasach on June 27, 2008
Ellen Brown, June 26th, 2008(Web of Debt)
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
– Thomas Jefferson, Letter to Treasury Secretary Albert Gallatin (1802)
Jefferson had it right. More than 1.5 million homeowners are expected to enter foreclosure this year, and about half of them are expected to have their homes repossessed. If the dire consequences Jefferson warned of 200 years ago have been slow in coming, it is because they have been concealed by what Jerome a Paris calls the Anglo Disease – “the highly unequal economy whereby the rich and the financial sector . . . capture most of the income but hide it by providing cheap debt to the middle classes so that they can continue to spend.” He calls “finance” the “cannibalistic” sector in today’s economy. Writing in The European Tribune this month, he states:
“[O]ne of the more attractive features of the financial world, for its promoters, is its ability to concentrate huge fortunes in a small number of hands, and promote this as a good thing (these people are said to be creating wealth, rather than capturingit). . . . [O]f course, the reality is that such wealth concentration is created by squeezing the rest, as is obvious in the stagnation of incomes for most in the middle and lower rungs of society. This is not so much wealth creation as wealth redistribution, from the many to the few. But what has made this unequality . . . tolerable is that the financial world itself was able to provide a convenient smokescreen, in the form of cheap debt, provided in abundance to all. The wealthy used it to grab real assets in funny money, and the rest were kindly allowed to keep on spending by tapping their future income rather than their insufficient current one; in a nutshell, the debt bubble hid the class warfare waged by the rich against everybody else.”1
Now the debt bubble is bursting, with the anticipated real estate crash, banking crisis, foreclosures, and inevitable recession. “The income capture mechanisms set up during the bubble have not been reversed, so the pain is falling disproportionately on the poorest,” writes Jerome a Paris. Meanwhile, finance is being bailed out. What’s to be done? “[T]he financiers . . . will say that more ‘reform’ and ‘deregulation’ and tax cuts are needed,” he says, but “maybe it’s time to stop listening to what is highly self-interested drivel, and take back what they grabbed: it’s not theirs.”
Good idea, but how? The financiers own the media, and their massively funded lobbies control Congress. How can we the people get enough clout to take on the giant financial and corporate giants? What can we do that will make politicians sit up and take notice?
How about swarming the courts? New case law indicates that a majority of the 750,000 homeowners expected to lose their homes this year could have a valid defense to foreclosure. As much as $2 trillion in real estate may be vulnerable to this defense, providing a very big stick for a lobby of motivated debtors. Mobilizing that group, in turn, could light a fire under the investors in mortgage-backed securities — the pension funds, money market funds and insurance companies holding these “orphan” mortgages. These investors also wield a very big stick, in the form of major law firms on retainer. When the embattled banks demand a bailout because they are “too big to fail,” the taxpayers can respond, “You have already failed. It is time to try something new.”
The Legal Trump Card: Make Them Produce the Note
A basic principle of contract law is that a plaintiff suing on a written contract must produce the signed contract proving he is entitled to relief. If there is no signed mortgage note or recorded assignment, foreclosure is barred. The defendant must normally raise this defense, and most defaulting homeowners, unaware of legal procedure and concerned about the expense of hiring an attorney, just let their homes go uncontested. But when the plaintiffs bringing subprime foreclosure actions have been challenged, in most cases they haven’t been able to produce the notes.
Why not? It appears to be more than just sloppy paperwork. The banks that originally entered into these risky subprime arrangements generally did so because they had no intention of holding the loans on their books. The mortgages were immediately sliced and diced, bundled up as mortgage-backed securities (MBS), and sold off to investors. Loan originators sold the mortgages to financial institutions or other banks, which then sold the rights to the monthly mortgage payment income to investors, while transferring the responsibility to collect these payments to specialized mortgage servicing companies. The result has been to slice up the mortgage contract, with no party really having ownership of the original paperwork. When foreclosure has been initiated, the servicer or trustee acting as plaintiff now has trouble proving that it originated the mortgage or owned the loan. In order for a second bank or financial institution to have standing to bring a foreclosure lawsuit in court, it must have been assigned the mortgage; and with the collapse of the housing market, many of the subprime lenders have gone out of business, making it impossible to contact the originating mortgage company. Other paperwork has just been lost in the shuffle.2
Why weren’t the mortgage notes assigned to the MBS holders when they were first sold? Apparently because the investors aren’t even matched up with specific properties until after default. Here is how the MBS scheme works: when the mortgages are first bundled by the banks, all of the subprime mortgages go into the same pool. The bundled mortgages are chopped into “securities” that are sold to many investors — banks, hedge funds, money market funds, pension funds — with different “tranches” or levels of risk. The first mortgages to default are then assigned to the high-risk “BBB-” tranche of investors. As defaults increase, later defaulting mortgages are assigned down the chain of risk to the supposedly more secure tranches.3 That means the investors get the mortgages only after the defendants breached the agreement to pay. It also means the investors weren’t a party to the agreement when it was breached, making it hard to prove they were injured by the breach.
The investors have another problem: the delay in assigning particular mortgages to particular investors means there was no “true sale” of the security (the home) at the time of securitization. A true sale of the collateral is a legal requirement for forming a valid security (a secured interest in the property as opposed to simply a debt obligation backed by collateral). As a result, the investors may have trouble proving they have any interest in the property, secured or unsecured.4
The Dog-Ate-My-Note Defense
When the securitizing banks acting as trustees for the investors are unable to present written proof of ownership at a time that would entitle them to foreclose, they typically file what’s called a lost-note affidavit. April Charney is a Florida legal aid attorney well versed in these issues, having gotten foreclosure proceedings dismissed or postponed for 300 clients in the past year. In a February 2008 Bloombergarticle, she was quoted as saying that about 80 percent of these cases involved lost-note affidavits. “Lost-note affidavits are pattern and practice in the industry,” she said. “They are not exceptions. They are the rule.”5
In the past, judges have let these foreclosures proceed; but in October 2007, an intrepid federal judge in Cleveland put a halt to the practice. U.S. District Court Judge Christopher Boyko ruled that Deutsche Bank had not filed the proper paperwork to establish its right to foreclose on fourteen homes it was suing to repossess.6 That started the ball rolling, and by February 2008, judges in at least five states had followed suit. In Los Angeles in January, U.S. Bankruptcy Judge Samuel L. Bufford issued a notice warning plaintiffs in foreclosure cases to bring the mortgage notes to court and not submit copies. In Ohio, where foreclosures were up by a reported 88 percent in 2007, Attorney General Marc Dann was reported to be challenging ownership of mortgage notes in forty foreclosure cases.7
Few defendants, however, are lucky enough to have advocates like Charney and Dann in their corner, and most defaulting debtors just let their homes go. A simple challenge can be filed to the complaint even without an attorney, and some subprime borrowers have successfully defended their own foreclosure actions; but retaining an attorney is strongly recommended. People representing themselves are often not taken seriously, and they are likely to miss local rule requirements. With that warning, here is some general information on challenging standing to foreclose:
Some states are judicial foreclosure states and some are non-judicial foreclosure states. In a judicial foreclosure state (meaning the matter is heard before a judge), if a promissory note or recorded assignment naming the plaintiff is not attached to the complaint, the defendant can file a response stating the plaintiff has failed to state a claim. This can be followed with a motion called a demurrer to the complaint. Different forms of demurrers can be found in legal form books in most law libraries. In essence the demurrer states that even if everything in the complaint were true, the complaint would lack substance because it fails to set out a copy of the note, and it should therefore be dismissed. Ordinarily there is no need to cite much in the way of statutes or case law other than the authority reciting the necessity of showing the note proving the plaintiff is entitled to relief.
In a non-judicial foreclosure state such as California, foreclosure is done by a trustee without a court hearing, so the procedure is a bit trickier; but standing to foreclose can still be challenged. If the homeowner has filed for bankruptcy, the proceedings are automatically stayed, requiring the lender to bring a motion for relief from stay before going forward. The debtor can then challenge the lender’s right to the security (the house) by demanding proof of a legal or equitable interest in it.8 A homeowner facing foreclosure can also get the matter before a court without filing for bankruptcy by filing a complaint and preliminary injunction staying the proceedings pending proof of standing to foreclose. A judge would then have to rule on the merits. A complaint for declaratory relief might also be brought against the trustee, seeking to have its rights declared invalid.9
An Equitable Settlement for Everyone
These defenses can help people who are about to lose their homes, but there is another class of victims in the sub-prime mortgage crisis: investors in MBS, including the pension funds and 401Ks on which many people depend for their retirement. If the trustees representing the investors cannot foreclose, the lucky debtors may be able to stay in their homes without paying. However, the hapless investors will be left holding the bag. If the investors manage to shift liability back to the banks, on the other hand, the banks could go down and take the economy with them. How can these tricky issues be resolved in a way that is equitable for all? That question will be addressed in a followup article. Stay tuned.
In These New Times 
Martin Weiss Fan said
http://www.moneyandmarkets.com/issues.aspx?Distortions-Deceptions-and-Outright-Lies-1640
April 7, 2008
Distortions, Deceptions and Outright Lies
by Martin D. Weiss, Ph.D.
Beware.
The greatest threat to your financial future is not the danger you see or the beast you know. It stems from all those realities that you don’t see or don’t know.
This great uncertainty is not your fault. Quite the contrary, I lay the blame squarely on …
1. Washington’s distortions of its most vital economic data …
2. Wall Street’s deceptive evaluations of most of your investments, and …
3. The outright lies that officials of both Washington and Wall Street tell you on a daily basis to cover their tracks or protect their turf.
Take Friday’s news, for example.
If you thought that the surge in the U.S. unemployment rate to 5.1% was a shock, consider John Williams’ Shadow Government Statistics.
First, Williams points out that the total job loss the government reported on Friday wasn’t just 80,000. It was 147,000. Reason: The previous two months of job losses had been greatly understated, forcing the government to revise them by a combined 67,000.
Second, he argues that these huge revisions are no accident. They are the consequence of the government’s continuing misuse of seasonal adjustments.
“If the process were honest,” he writes in his Flash Update issued to paid subscribers on Friday, “the differences would go in both directions. Instead, the differences almost always suggest that the seasonal factors are being used to overstate the current month’s relative payroll level, as seen last month and the month before.”
Third, his analysis shows that the job numbers have a built-in bias based on a model that makes assumptions about birth and death rates. Without those distortions, he calculates there would have been additional job losses of 135,000 in February and 142,000 in March.
Fourth and most important, as you probably know, the government excludes “discouraged workers” from its count of the unemployed; and the definition of “discouraged” is highly questionable — anyone who has not looked for a job in just the past four weeks!
His conclusion: The true unemployment rate in America is not 5.1%. It’s 13%, or over two and a half times worse than officially reported.
The government’s distortions of other critical data are no less egregious, says Williams.
Annual Consumer Inflation
Inflation: The government reports that the Consumer Price Index (CPI) is essentially the same as it was two decades ago: It was approximately 4% in 1987, and it’s near 4% right now.
But without the cumulative affect of a series of questionable adjustments made in recent decades, Williams calculates that the CPI has actually risen to almost 12%, or about three times higher than the official figures.
Economic growth: The government reports that, except for a brief interlude in the early 2000s, the U.S. economy has escaped recession throughout this decade, growing by 2% to 4% each year.
But Williams shows how, without the government’s distortions of the GDP data, the opposite would be true: Except for brief interludes of mediocre growth in 2000 and 2004, the economy has been stuck in a recession throughout the entire decade.
These are vital stats that could make or break your financial future. To the degree that the shadow government stats are closer to the truth than the official versions, it means that …
* The value of your bonds is overstated because of a national complacency regarding consumer price inflation …
* The value of your stocks is overstated because of false optimism regarding the nation’s employment and economic growth. And perhaps most dangerous of all …
* Trillions of dollars in derivatives — predicated on the true value of assets like stocks and bonds — could be even shakier than often feared.
This alone should be more than enough to send thousands of officials into the confessional and give millions of investors sleepless nights. But the unfortunate reality is that …
On Top of Washington’s Data Distortions,
Wall Street Adds an Equally Dangerous
Layer of Investor Deceptions
First, most of the derivatives owned by commercial banks, investment banks and so-called “non-bank banks” are kept off their balance sheets. This means that …
The actual value and stability of the nation’s largest and most important institutions are largely unknown — and probably greatly overstated.
Second, with only the rarest of exceptions, the hundreds of thousands of bond ratings issued by Fitch, Moody’s, and Standard and Poor’s are uniformly bought and paid for by the very same companies that are being rated. As I’ve written here many times, the result is that …
There is a built-in bias in the entire system, causing inflated ratings, delayed downgrades and the continuing deception of millions of investors.
Third, brokers and brokerage firms, despite a clear self-interest to keep their clients in the stock market, are routinely allowed to play the role of “objective” advisers and managers. The result is that …
Investors are almost universally encouraged to buy when they should be holding and to hold when they should be selling. Despite a plethora of guidelines, rules and laws created to encourage fairness, the very structure of the system continually promotes unfairness.
Lies, Lies, Lies
In this environment, the unrelenting pressure — even the mandate — to transform well-meaning public officials into chronic liars is undeniable, and the examples are many:
* High-ranking government officials in the 1970s who swore the S&Ls were safe, even as thousands of thrifts were failing all around them.
* FDIC and Federal Reserve officials in the 1980s who vehemently denied the threat to commercial banks, even as the bank failure rate surged to the highest since the Great Depression.
* State insurance regulators in the 1990s who swore to the safety of annuities and life insurance policies, even as six million policyholders were being trapped in failed companies.
* Major Wall Street firms of the early 2000s that consistently affirmed “hold” and “buy” ratings for the shares of hundreds of companies that were going bankrupt. (For our detailed study documenting these extreme deceptions, see our white paper, Crisis of Confidence on Wall Street.)
* Auditing firms like Arthur Andersen, KPMG, and Deloitte and Touche that facilitated or even encouraged accounting distortions and cover-ups. (For the details, see our white paper submitted to the U.S. Senate.)
Today, the names and places may have changed. But the systemic deceptions have not.
This leaves you just two choices: Believe them and risk almost everything. Or strike out on an independent path to safety, protection and the potential for very substantial profits.
Good luck and God bless!
Martin
Martin Weiss Fan said
Once again, Martin Weiss has stood up and said “THE EMPEROR ISN’T WEARING ANY CLOTHES”. He is in a unique position to know what is happening to our economy and it ISN’T GOOD.
You have been warned.
I am posting this everywhere I can after having been ripped off by my previous investment advisor. My mission is to make sure as FEW people as possible become victims the Wall Street Casino games these goons and their regulator ‘friends’ will try to pull on innocent people. So don’t take my word for it, go to his website and check out his bio as well as the archives. You will see how many of his predictions have come to pass and how much education he has had that backs up his expertise.
http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=1919
Sell, Hedge … or Be Prepared to Lose!
by Martin D. Weiss, Ph.D. 06-30-08
The stock market is falling swiftly, and you don’t have the luxury of time. So I’ll get straight to the point:
If you haven’t done so already in response to our many earlier warnings, you’d better sell or hedge your vulnerable investments now. If you don’t, be prepared to suffer far deeper losses in the bear market of 2008 and beyond.
But beware: Most brokers will try to talk you out of it. They have a hidden agenda. They want to keep you as a customer; and they know that, once customers sell their stocks, they often close their brokerage accounts.
With this in mind, many brokers have been trained with up to seven sales pitches designed to keep you in the market come hell or high water.
Broker Pitch #1: “Buy more.” Their argument goes something like this: “Your stock is now selling at bargain prices. So if you didn’t already own 100 shares, you’d probably be thinking about buying — not selling. Instead, why not double down and take advantage of dollar-cost averaging?”
The more likely result in a bear market: Every time your stock falls by another $1 per share, instead of losing just $100, you’ll be losing $200.
Broker Pitch #2: “Hold for a recovery!” They argue that the “market will inevitably recover,” that the “recovery is always bigger and better than any near-term decline,” and that you should therefore “always invest for the long term.”
The reality: Bear markets can last for years. It could take still longer for the averages to recover to current levels. During all those years, your money is dead in the water. And don’t forget: If the company goes out of business, your stock will be worthless and will never recover.
Broker Pitch #3: “You can’t afford to take a loss.” If you insist on selling, brokers often come back with this approach: “Your losses are just on paper right now. So if you sell, all you’ll be doing is locking them in. You can’t afford to do that.”
What they don’t tell you is that there’s no fundamental difference between a paper loss and a realized loss. Nor do they reveal that the Securities & Exchange Commission (SEC) requires brokers themselves to value the securities they hold in their own portfolio at the current market price — to recognize the losses as real whether they’ve sold the securities or not.
Broker Pitch #4: “You can’t afford to take a profit and pay the taxes.” If you’ve got a profit in a stock, they say: “All you’ll be doing is writing a fat check to Uncle Sam. You can’t afford to do that.”
The reality: Although it’s not shown on your brokerage statement, the true value of your portfolio is NET of taxes. So whether you or your heirs pay those taxes now or in the future is mostly a difference of timing. And if our next president approves legislation to raise capital gains taxes next year, it could actually cost you more. Besides, which would you prefer — paying some taxes on profits or paying no taxes on losses?
Broker Pitch #5: The “don’t-be-a-fool” argument. “Stocks look very cheap now and we’re very close to rock bottom,” goes the script. “We may even be right at the bottom. If you sell now, three months from now, you’ll be kicking yourself. Don’t be a fool.”
The truth: Brokers don’t have the faintest idea where the bottom is. Nor does anyone at their firm. And they know darn well that stocks do not hit bottom just because they look cheap. Worse, for their own accounts, brokers and their affiliates have been — and are likely to continue — liquidating shares, often targeting precisely the same shares they pitch to their customers.
Broker Pitch #6: “The market is turning.” If the market enjoys an intermediate bounce, which it certainly will at some point soon, this pitch is invoked. “Look at this big rally!” they say. “Your shares are finally starting to come back. After waiting all this time, are you sure you want to run away now — just when things are starting to turn around in your favor?”
The truth: In a bear market, intermediate rallies actually give you the best opportunity to sell.
Broker Pitch #7: The last ace-in-the hole in the broker’s arsenal of pitches is the patriotic approach. “Do you realize,” they’ll say, “what could happen if everyone does what you’re talking about doing?” That’s when the market would really nosedive. But if you and millions of other investors would just have a bit more faith in our economy — in our country — then the market will recover and everyone will come out ahead.”
The truth: Locking up precious capital in sinking enterprises is not exactly good for our country. Better to safeguard the funds and reinvest them in better opportunities at a better time.
Surprise, Surprise: The Wall Street Journal
Has Just Made Some of These Same Pitches
Given that the Nasdaq lost more than 75% of its value in the early part of this decade and that bank stocks are now down over 50% since their recent peaks, you’d think Wall Street would have learned to refrain from pitching the same old BS.
But if this weekend’s edition of The Wall Street Journal is any indication, little has changed …
“There’s a decent argument to be made for buy and hold,” says the Journal. “Aside from the absurdity of liquidating an entire equity portfolio — the tax headaches would be epic — investors ultimately end up better off than if they had tried to sell at the top and buy at the bottom. ‘It’s hard to time the market, so stay in and benefit from the inevitable turnaround,’ says David Dreman, chairman of Dreman Value Management.”
In other words, they’re telling you to sit it out and watch the value of vulnerable stocks evaporate.
My view: This advice is driven by the same hidden agenda still prevailing in the brokerage industry — to keep you in bad stocks at all costs.
Were you entrapped by similar pitches during the great tech wreck of 2000-2002? If not, great! If so, don’t let it happen again. And in either case, use it as a learning experience — to pull out some valuable lessons that could save you a lot of money today …
Lesson #1
Many Stocks Have Hidden Risks
That No One Tells You About.
Even during the tech bubble, most investors recognized that there was a chance their stocks could go down, at least for a short while. But they never dreamed their tech stocks could go down so far nor so fast. They had no inkling of the multiple, hidden risks that can drive their portfolios into the gutter:
The risk of earnings lies. Let’s say a stock is selling for $40. And let’s say its earnings are $2 per share. So it’s valued at 20 times earnings, and this is considered fair. Suddenly, the news comes out that the earnings are a bold-faced lie. The true earnings of the company is only half what was stated — $1 per share. “Oh, no!” exclaim the investors. “At 20 times earnings, it’s really only worth $20 per share.” The stock promptly plunges to $20 — an instant 50% loss to shareholders.
In the tech wreck, we saw this kind of outright fraud at big-name companies like Enron, Worldcom, Tyco, and Adelphia. And we saw it repeated hundreds of times with lesser companies. This time around, we see a similar pattern among financial companies that continually understate, cover up or even lie about their true losses.
Case in point: In March 2007, a Bear Stearns hedge fund manager emailed a colleague saying, “The sub-prime market is pretty damn ugly … I think we should close these funds down.” Instead, the company soothed investors with the message that “all was fine.” Three months later, the funds failed and investors were left with less than 30 cents on the dollar.
The risk of inflated Wall Street ratings. In the tech bubble, Wall Street’s enthusiastic “buy” ratings — often bought and paid for by the rated companies — drove thousands of investors into stocks that weren’t worth the paper they were printed on. When it became apparent that the stock ratings were a sham, investor losses were greatly compounded.
Today, little has changed. The SEC and Elliot Spitzer’s attempt to encourage independent research on Wall Street has largely failed.
Worse, the ratings issued by Wall Street’s leading government-sanctioned agencies — Moody’s, S&P and Fitch — are still bought and paid for by the rated companies, often resulting in inflated grades.
Case in point: The rating agencies stalled for months before finally downgrading the nation’s giant bond insurers, Ambac and MBIA. And despite the recent downgrades, the ratings still fail to recognize that the bond insurers’ entire business model — based on unanimous triple-A ratings — has been destroyed.
The evidence: Credit swaps being traded right now on Ambac and MBIA imply that the probability of default over the next five years is an astounding 90%! And still they’re getting “A” or better ratings? It’s a joke.
The risk of failure. The company goes out of business and investors suffer a 100% loss. Unusual? Not quite. In the tech wreck, at least 600 Internet companies went under. And between 1990 and 2002, bankruptcy claimed 390 insurance companies, 932 banks and thrifts, plus tens of thousands of business corporations.
The situation today: Although the Federal Reserve was able to ease the credit crunch by dropping interest rates seven times and rescuing the likes of Bear Stearns, analysts are now concerned that the Fed is running out of options. What happens in the wake of the next big meltdown? I don’t think you want to hang on to your financial stocks while Wall Street tries to guess at the answer.
My rule number one of investing is: Never underestimate the risk.
Lesson #2
So-Called “Free Advice”
Can Cost You a Fortune!
You can get “free advice” from many sources — not just your stockbroker, but also your insurance agent, your financial planner and other professionals. But it isn’t really advice. And it certainly isn’t free.
In the last bear market, “free advice” — embedded in the hyped-up ratings and research reports issued by major Wall Street firms — cost investors a fortune, luring them into Nasdaq stocks that brought losses averaging more than $75 for every $100 invested near the peak. Plus, free advice in other areas — from bonds to insurance — can be equally expensive.
With “free advice,” you can actually get hurt in three different ways:
* You pay significant fees that, despite any assurances to the contrary, inevitably wind up coming out of your pocket.
* You buy investments that are more likely than usual to be underperformers or outright losers.
* You wind up getting locked in to plans or programs that charge various kinds of exit penalties. So when a better, alternative opportunity comes your way, you have to either pass it up or pay through the nose to switch.
In short, taking “free advice” can be like walking into the ring with a professional wrestler. First, he socks it to you with fees. Then, he dumps you into bad investments. And last, he pins you down on the mat and won’t let you go.
So my rule number two of investing is: Never act on so-called “free advice.”
How can you tell? It’s actually quite simple. Everyone you deal with in the financial industry is either a salesperson or an analyst/advisor. It’s virtually impossible for anyone to be both at the same time.
The salesperson will tell you he’s not charging you for the advice. He’ll tell you it “comes with the service” or it’s covered by the transaction fees or commissions. That’s a dead giveaway.
The analyst (or a true advisor) tells you, up front, what he’s going to charge you, he charges the fee, and then he tells you what he charged you. It couldn’t be clearer.
The fee could be something in the neighborhood of $100 per year for a subscription to an investment newsletter. Or it could be, say, $100 per hour for a personal consultation. That’s cheap insurance that can save you — or make you — a tidy sum.
Still not sure how to distinguish between a salesperson and a true analyst or advisor? Here’s what I suggest: No matter whom you encounter in the financial industry — stockbroker, insurance agent, financial planner or banker — ask these questions:
1. Do you (or your company) make more money the more I buy? If the answer is yes, you’ve got a problem right off the bat. Often, the best investment decision is not to buy. And sometimes an even better decision is to sell. If buying nothing or selling is going to be a negative for his earnings, you don’t have an advisor. You’ve got a salesperson posing as an advisor.
2. Who pays your commissions or fees? If he says it’s someone other than you, he’s probably lying. Shake his hand, bid him farewell and walk out the door. No financial institution I’ve ever heard of really pays sales commissions out of its own pocket. If a salesperson is making commissions, it always comes out of your pocket, directly or indirectly.
3. Where are you getting the information or report you’re giving me? If the answer is a source that will benefit from your purchase, you can probably throw most of the info into the trashcan.
In the tech wreck, investors got hooked by salespeople repeatedly. And the same is happening right now. But with these three questions, you can discard the salespeople and find the true advisors. They are those who are …
* Always compensated by you — not by the companies whose financial products you buy.
* Always compensated for their time or their information — not for a sale.
* Always your advocate and defender. Whether it’s just a normal, friendly transaction or a heated legal dispute, it’s always crystal-clear which side they’re on — yours and only yours.
I repeat: “Free advice” is neither free nor advice. Sooner or later, it could cost you a fortune in terms of mediocre performance or, worse, outright losses.
Am I being overly harsh on ethical brokers, sales agents and financial planners? Perhaps. But only in the sense that it’s not really their fault. It’s the system that’s rigged against you.
You see, even the most well-meaning salespeople still have to make a living. But they can’t make a good living if they tell their clients to stay out of the most popular stocks … avoid mutual funds that charge a big fee … or stick with insurance policies that pay the lowest commissions. Nor can they afford to recommend investments that involve very low fees and commissions, which happen to include some of the best choices you can make today.
If they consistently give you this kind of advice, they can’t put food on the table for their families — let alone send their kids to a good college. And they’ll never be eligible for the big bonuses and rich rewards that inevitably flow to the top-performing salespeople.
Many salespeople do try to be as ethical as they can be within the limitations of the system. They’re friendly and helpful. They bend over backwards to do right for their clients. But they’re still salespeople. Work with them to buy the products you want. But get your information and advice elsewhere.
Lesson #3
Wall Street’s “Rules of Thumb”
Are Often Flawed or Deceptive
The bias revealed in the last bear market went beyond just recommending bad investments. It also was the source of many investing “rules” promulgated by Wall Street pros and blindly accepted by most investors — most of which were myths in disguise.
Some examples …
Myth: “Always invest in stocks for the long term.” You saw this in The Wall Street Journal story I just quoted. And you’ve probably heard it in many other permutations as well: “Historically, stocks have always moved higher,” they say. “Bull markets are longer than bear markets,” goes the argument.
The reality: Most of the stats they cite assume you bought stocks after a major decline, when they were at rock bottom. The reality is few people ever buy at those levels. Indeed, most people tend to buy most of their stock after a major rise, when stocks are very pricey. For example:
* If you bought the average Dow Jones Industrial stock before the Crash of ’29, you would have lost 89 cents for every dollar invested. And even if you had both the cash and the courage to hold on (few did!), you’d still have to wait 24 years — a full generation — before you could recoup your original investment … and another 20 years before you could catch up with an investor who just earned a steady 5% yield during that period.
* If you bought the average Dow stock at its peak in 1973, you would have lost 45.1%. The Dow touched an all-time high of 1051 on January 11, and then dropped for two years, hitting 577 in December 1974. It did not cross above 1000 again until eight years later.
* Losses in many so-called “conservative stocks” were just as bad. If you bought the average utility shares, considered safer than most stocks, your losses would have been 88.2% in 1929-32 and 45.3% in 1973-74.
* All the averages understate the true losses and recovery periods. Reason: Bankrupted — or greatly downsized —companies are routinely removed from the averages and replaced with cream-of-the-crop companies. If your portfolio includes some of those companies, your losses will be worse than the averages and your recovery period will be longer.
Myth: “Don’t sell in panic. It’s probably the bottom.” Why is it that when brokers sell, it’s supposedly based on reason — but when you or I sell, they say it’s based on emotion?
The classic example they like to remind you of is the Crash of ’87, which took the Dow down 36% in a big hurry, and then was over almost as quickly as it began. “People who sold at the bottom of the ’87 crash missed out on the biggest bull market in history,” they say.
The reality: There are two problems with that argument. First of all, even if you sold at the very worst time in 1987, there were many, many opportunities to buy back into the market in subsequent months.
Second, their recommendation not to sell didn’t work too well in 2000-2001. The pundits unanimously declared a bottom in April 2000 when the Nasdaq was off 37.1%. Then, they declared another bottom in December 2000, when it was down 55.4%. If you followed their advice, instead of getting hurt just once, you got killed again and again.
Then, ironically, when the Nasdaq did hit a bottom — that’s when the majority of “experts” on Wall Street themselves began to panic! Reflecting the nearly unanimous pessimism of Wall Street experts, Business Week advised its readers to dump their shares even if they had already plunged 80% or 90%. Time’s front cover featured a mean bear and warned of more big trouble ahead. Nearly all the great “bulls” on Wall Street temporarily abandoned their optimistic bent and “warned” you about events that had already happened.
My rule number three of investing: Sell BEFORE the panic stage. In practice, that means selling just as soon as your stocks fall below a predetermined loss level that you’re comfortable with. The actual level will vary, and certain investments, like options, must be treated differently. But generally, a 20% decline in a stock is a key level to consider.
Myth: “Mutual funds have smart managers. They will give you diversification. They will protect you.”
The reality: Mutual funds are neither manna from heaven nor the holy grail of investing. In the great stock market years between 1997 and 1999, only 24% outperformed the S&P 500.
In 2000-2001, the smart, sophisticated mutual fund managers running tech funds got scammed just like everyone else. In fact, every single one of 200 tech stock funds lost money, with 72.5% of the funds losing more than the Nasdaq Composite Index. So much for expertise and diversification!
Four More Rules of
Investing in Today’s Market
My rule number four: Keep a substantial portion of your money in cash or cash-equivalent, including foreign currencies. (For specific instructions, see my two-weeks-ago Money and Markets, Triple Crisis: Your First Defense.)
My rule number five: Hedge with inverse ETFs — special exchange-traded funds designed to go UP in value when the market goes down. (For my step-by-step plan, see last Monday’s Money and Markets, The Triple Crisis Strikes Harder.)
My rule number six: Diversify over a broad spectrum of other investment classes, including natural resources like oil and natural gas. (If you want to get Sean’s oil report coming out tomorrow, today’s your last day to sign up. Click here. And if you invest in oil and gas stocks, be sure to also follow my rule number five for protection.)
My rule number seven: If you work with a money manager, ask him about his programs designed for a bear market. If he doesn’t have one, move your assets to one who does.
Good luck and God bless!
Martin
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This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
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MARTIN D. WEISS is one of the nation’s leading providers of a wide range of investment information. He is chairman of The Weiss Group, Inc. which consists of four separate corporations, including Weiss Research, Inc., the publisher of the Safe Money Report. The Weiss companies have helped thousands of individuals make informed investment decisions and objectively discriminate between strong and weak stocks, insurance companies, HMOs, banks and S&Ls.
Dr. Weiss began his career in 1971 when he founded Weiss Research, dedicated to evaluating the safety of financial institutions and investments for consulting clients. After spending two years in Japan as a Fulbright Scholar studying management techniques at Japanese financial institutions, Dr. Weiss returned to the United States in 1980 to begin issuing formal safety ratings on banks and savings institutions. His firm issued the first independent insurance ratings in 1989, the first ratings of brokerage firms in 1992, and the first HMO ratings in 1994.
Acclaimed for his accurate, objective evaluations, Dr. Weiss has appeared on ABC, CBS, NBC, CNBC, and network news programs, including The Today Show. He has been quoted in hundreds of newspapers and magazines, including The Wall Street Journal, USA Today, The New York Times, The Chicago Tribune, The Los Angeles Times, Esquire Magazine, Money, Business Week, Fortune, and The Institutional Investor. Plus, books by Weiss have been published in Japanese and serialized in major Japanese business magazines and newspapers such as Economisto and the Japan Economic Journal. Articles have also appeared in the London Spectator and other European economic journals.
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Dr. Weiss is the editor of the financial newsletter, Safe Money Report, known for its track record in picking major turns in interest rates. Dr. Weiss also serves as editor or co-editor for a number of Premium Services. He is also the author of The Ultimate Safe Money Guide: How Everyone 50 and Over Can Protect, Save and Grow Their Money and Crash Profits: How to Make Money When Stocks Sink AND Soar.
Martin Weiss holds a bachelor’s degree from New York University and a Ph.D. from Columbia University.
“Dr. Weiss has testified before Congress and the National Conference of Insurance Legislators regarding insurance company stability, where he has proposed legislation requiring full financial disclosure to the consumer. He testified before the U.S. Senate Permanent Subcommittee on Investigations when it considered the financial difficulties befalling Blue Cross/Blue Shield member companies. He is also a frequent guest speaker and lecturer at major investment seminars in the U.S. and abroad. Most recently, Dr. Weiss presented to the National Press Club his solution for eliminating the conflicts of interest rampant in the brokerage industry.”
*Thanks Colin for the nice comment”